Indian Banks Have Sufficient Buffers for IFRS 9 Transition

Mumbai/Hong Kong, Aug 14, 2024

Fitch Ratings believes Indian banks have sufficient buffers to absorb the impact from the country’s transition to IFRS 9 accounting. Our base case estimates a nearly 55bp impact from expected credit losses on the banking system's average common equity Tier 1 (CET1) ratio in the financial year ending March 2025 (FY25). This gradually increases to about 100bp by FY28, provided the IFRS framework is implemented in FY26, with the one-time impact on the CET1 ratio phased over five years, as proposed by the Reserve Bank of India.

The absence of a phased transition would result in a one-time CET1 impact of around USD26 billion, or 140bp of the sector's risk-weighted assets. Private banks are better placed to handle the impact than state-owned banks, due to the former's higher core capital, pre-impairment profitability and better recovery track record. State-owned banks should maintain capital ratios above the regulatory minimum under a phased transition, but some state banks may need to raise fresh capital to support loan growth and sustain core capitalisation.

Indian banks' pre-impairment profit should also be sufficient to absorb the higher credit costs after the expected credit loss implementation. We estimate a 40bp drop in the sector's average operating profit/risk-weighted assets ratio due to a rise in loan impairment charges of about 40bp.

We do not expect rating changes due to IFRS 9 adoption; however, banks’ risk profiles could benefit from effective implementation that enhances underwriting and risk controls. These currently constrain the Viability Ratings of most Indian state banks. All Fitch-rated Indian banks' Issuer Default Ratings are support-driven and are therefore unlikely to change.

[Fitch Ratings]