Chennai : Credit rating agency Standard and Poor’s (S&P’s) Wednesday said that the banks in Brazil, Russia, India and China (BRIC) could come under pressure over the next one or two years but their ties with the governments would underpin their credit profiles.
However, the rating agency believes the asset quality of Indian banks is likely to be affected due to inflation, moderation in economic activity, rupee depreciation and others.
According to the report by S&P’s Ratings Services titled “Government Support should enable BRIC Banks To Ward Off Economic Headwinds”, a slowdown in growth in China, Brazil, and particularly India could weaken the asset quality and earnings of banks in these countries.
The report terming the situation in Russia as somewhat different said the country’s banking industry was likely to continue its recovery from a severe recession in 2008-2009 for at least the next two years.
The rating agency gave a stable outlook rating on large banks in Brazil, Russia and China on the expectation that these countries will maintain their good economic resilience to a global slowdown and that their banking sectors will experience only a moderate deterioration in asset quality and earnings.
The negative outlook on the banks in India (BBB-/Negative/A-3) reflected the negative outlook on the sovereign rating.
“State ownership and control of a significant part of the banking industry in BRIC countries is a critical rating factor,” said S&P’s credit analyst Geeta Chugh.
“Such a link is integral to the economic model of these countries. We expect governments to step in to avoid any abrupt and unexpected deterioration in local banks’ financial condition. Government ownership and economic development policies link the credit ratings on the largest BRIC banks to government creditworthiness,” Chugh said.
“We believe the asset quality of Indian banks is likely to deteriorate due to the moderation in economic activity, high inflation, high interest rates and rupee depreciation,” she said.
“Small and midsize companies are particularly vulnerable. Stress is also mounting on some highly leveraged large companies,” she added. “Among BRIC banking systems, the Brazilian banking sector is the least risky overall as reflected in our Banking Industry Country Risk assessments,” said S&P’s credit analyst Sergio Garibian.
“But even though we expect Brazilian banks’ asset quality to erode further in the second half of 2012, we expect the erosion to be moderate given the low unemployment in the country,” Garibian said.
“The 2008-2009 recession in Russia put an end to a long cycle of rapid credit expansion in the country. It resulted in high credit losses and loan restructuring, a reduction of cross-border debt, and active government support to banks and industrial companies. Growth rebounded robustly in 2011, when system wide loans expanded 27 percent. We expect credit to expand about 15 percent in 2012 and 2013,” said S&P’s credit analyst Pierre Gautier.
According to the report, whereas asset quality in Brazil, China, and India was weakening, problem assets in Russia were declining from the peak of the recession despite credit risk in Russia remaining very high.
The earnings of banks in China and Brazil could decline in 2012, but remain satisfactory. Returns in India and Russia in 2012 are likely to be at levels similar to 2011.