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US Banking Industry Braces For Downgrades As Indian Banking Industry Gets Upgrades

A Fitch Ratings analyst has warned that the U.S. banking industry is facing the risk of sweeping rating downgrades on dozens of banks that could even include the likes of JPMorgan Chase

By Govindraj Ethiraj
New Update
US upgrade IND downgrade
On today’s episode, financial journalist Govindraj Ethiraj talks to oil analyst Vandana Hari of Vanda Insights as well as Yuvika Singhal, Economist at QuantEco Research.

Our Top Reports For Today

  • <00:50> US Banking industry braces for downgrades as Indian banking industry gets upgrades.
  • <04:36> Oil Prices, Until Recently Projected Staying Low, Are Now SkyRocketing with Vandana Hari
  • <13:07> When will inflation settle down? with Yuvika Singhal
  • <20:27> A Plant In A Year. Ramping Up Manufacturing In The New Age
  • <24:03> Ahmedabad, Kolkata and Pune are cities where you can actually afford homes.


TRANSCRIPT

NOTE: This transcript contains only the host's monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.

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In 2008, the US faced a banking crisis and Indian banks weathered the storm, for various reasons including the fact that foreign banks in India never had too much play in the Indian banking system.

The Indian banking system has not held up very well after that as massive defaults crippled banks, turning it into a political hot potato too. The clean-up effort that followed in the last few years has led to most Indian banks now sporting strong balance sheets, at least much stronger than in the previous decade.

Before we come to Indian banks, back to the US.

Fitch Ratings analyst has warned that the U.S. banking industry is facing the risk of sweeping rating downgrades on dozens of banks that could even include the likes of JPMorgan Chase.

The ratings agency cut its assessment of the industry’s health in June.

Christopher Wolfe, analyst and MD for bank ratings in North America said this cut in assessment went largely unnoticed because it didn’t trigger downgrades on banks.

But another one-notch downgrade of the industry’s score, to A+ from AA-, would force Fitch to reevaluate ratings on each of the more than 70 U.S. banks it covers, Wolfe told broadcaster CNBC at the firm’s New York headquarters.

“If we were to move it to A+, then that would recalibrate all our financial measures and would probably translate into negative rating actions,” Wolfe said.

Incidentally, another rating agency Moody’s downgraded 10 small and mid sized banks and warned that cuts could come for another 17 lenders, including larger institutions like Truist and U.S. Bank, CNBC said.

This all comes on the heels of a massive downgrade earlier this month when Fitch downgraded the U.S. long-term credit rating, blaming it on political dysfunction and growing debt loads.

This time, Fitch is intent on signalling to the market that bank downgrades, while not a foregone conclusion, are a real risk, said Wolfe.

The firm’s June action took the industry’s “operating environment” score to AA- from AA because of pressure on the country’s credit rating, regulatory gaps exposed by the March regional bank failures and uncertainty around interest rates.

The problem created by another downgrade to A+ is that the industry’s score would then be lower than some of its top-rated lenders. The country’s two largest banks by assets, JPMorgan and Bank of America would likely be cut to A+ from AA- in this scenario, since banks can’t be rated higher than the environment in which they operate.

And if top institutions like JPMorgan are cut, then Fitch would be forced to at least consider downgrades on all their peers’ ratings, according to Wolfe. That could potentially push some weaker lenders closer to non-investment-grade status.

Back home, Fitch has upscaled Indian banks saying the operating environment for Indian banks has strengthened as economic risks associated with the Covid-19 pandemic have ebbed.

"A number of prudential indicators for the sector have also improved compared with pre-pandemic levels, though growing risk appetite in a relatively benign operating environment highlights the importance of appropriate buffers against potential stress," Fitch said.

Fitch had revised its 'operating environment' mid-point score for Indian banks to ‘bb’ from ‘bb+’ in March 2020 after assessing that the pandemic was likely to worsen the existing OE stresses facing the sector. India was badly affected by the pandemic, but the associated risks have now receded. 

Fitch affirmed the sovereign’s rating at ‘BBB-' with a 'stable’ outlook in May and is currently forecasting real GDP growth to average 6.4% annually in the three years to March 2026 (FY23-FY25).

Earlier in May, S&P Ratings had also said that it expects the banking sector profitability to stabilise at a healthy level and that banks' asset quality will continue to improve.

Indian banks' earnings will likely remain healthy, according to the ratings agency.

"The formation of new nonperforming loans will remain at cyclical low levels, despite pressure from higher interest rates," S&P Global Ratings credit analyst Geeta Chugh said. "A recovery in written-off accounts is also boosting the profitability of banks," BQ Prime quoted her as saying.

While all this is good news, the India part that is, one must also keep in mind that things can reverse pretty quickly. 

Oil Prices Are Rising

Two months ago, it looked like oil prices would float and drift in the $70 per barrel range for the rest of the year, now they are on a tear of sorts in the $85 range and poised to shoot even further, going by what analysts are saying.

This has various implications of course though not perhaps immediately.

In June last year, oil had touched $112 a barrel leading to much concern all around. Russia invaded Ukraine in late February 2022.

The International Energy Agency said last week that global oil demand reached record levels in June and is poised to peak again in August.

World oil demand hit a record 103 million barrels a day in June, the IEA said.

The agency said demand could rise further in August and demand for 2023 as a whole is expected to reach 102.2 million barrels a day.

China is responsible for most of this spike, or more than 70%, the IEA said, adding that demand there was “stronger than expected” and reached new highs “despite persistent concerns over the health of the economy.”

The IEA said Russia’s oil exports breached the price cap put in place by the Group of Seven (G7) nations. 

Prices reached an average of $64.41 a barrel last month, the IEA said, above the $60 a barrel cap the group set. 

Forbes magazine describes the cap as being designed to limit Moscow’s ability to fund its war in Ukraine while simultaneously averting chaos in global energy markets. 

The rule has changed the flow of oil and exports from Russia, a major producer, away from Europe and towards Asia. 

The IEA said crude exports to India and China accounted for 80% of Russia’s shipments.

To understand what has fundamentally changed in recent months and what that tells us about the near future on oil prices, I reached out to oil analyst Vandana Hari of Vanda Insights in Singapore.

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WHERE IS INFLATION GOING?

Speaking about rising crude prices, the other thing which is rising and we have been discussing is food prices and thus overall inflation.

India’s Consumer Price Index (CPI) inflation jumped to 7.4% in July 2023 as compared with 4.8% in June 2023. This is now a 15-month high.

Incidentally, a Reuters poll of 53 economists had estimated the consumer price index (CPI) inflation to rise up to 6.40 per cent on an annual basis on surging food prices. 

The jump was primarily driven by food inflation which accounts for nearly half of the inflation basket. 

The larger question of course is what is the near future looking like and what if anything could rein in rising prices ?
I spoke with Yuvika Singhal, Economist, QuantEco Research and began by asking her what she was reading in the numbers and more importantly, when she saw it coming down?

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Ramping Up Manufacturing

Apple Inc’s next generation iPhone 15 is set to launch mid September or less than 4 weeks.

Production of this latest Apple phone model is already starting in Tamil Nadu, known once upon a time for its temples and arts but now equally for its rapidly growing electronics ecosystem, apart from the traditional auto and auto components industries.

The larger point here is that setting up manufacturing plants in this electronics-semiconductor or computer on wheels era is much faster than what we thought or knew of. Though Tesla has a record of sorts here and I will come to that in a moment.

A Foxconn Technology Group plant in Sriperumbudur is preparing to deliver the newest iPhone devices 15 weeks after they start shipping from factories in China, as the company tries to swiftly increase the volume of new iPhones coming from India., Bloomberg News is reporting.

Earlier, Apple only assembled a small part of its iPhones in India and which was running around 6-9 months behind China.

Now, Apple produced 7% of its iPhones in March end and is worth $7 billion.

Of course, the iPhone15 production flow will depend on both the availability of components which will be imported and the production lines at Sriperumbudur near Chennai.

Incidentally, other Apple suppliers in India — Pegatron Corp. and a Wistron Corp. factory that is being acquired by the Tata Group — will also soon assemble the iPhone 15, sources told Bloomberg.

Speaking about speed, Tesla, which is presently in advanced talks to set up a plant in India to make a roughly Rs 20 lakh car in India according to reports, can likely go or come to market faster than most people think.

Which is as much a feature of Tesla as it is of modern manufacturing assembly systems. Tesla’s Shanghai gigafactory went from permits to finished plant in just 168 days to open in January 2020 to launch the Model 3, Bloomberg reported then.

At the time, the China plant was already assembling more than 1,000 cars a week and was ramping up fast.

All this is to say that the manufacturing system in this era of factories can come up quite rapidly. That is assuming of course that the permits, permissions and maybe subsidies, also move as fast.

Tesla’s China produced car at the time was included on a list of vehicles qualifying for an exemption from a 10% purchase tax in China. It also qualified for a government subsidy of around $3,560 per vehicle.

Rains Are Moody

Last month there was excess rain and thus above normal rains. 

Now, two weeks into August, we are apparently looking at 'below normal' rainfall. 

Data presented by the India Meteorological Department says rainfall went from a positive 15 percent in July to a negative 36 percent in August as 263 out of 717 districts in India received inadequate rainfall.

And bizarre as it might sound to someone who is not familiar with India’s drought to floods paradox, we are now once again confronted with drought.

 The deficit rainfall in multiple eastern and southern states has firmed up the fear of drought, particularly in worst-hit states like Bihar where 31 out of 38 districts received inadequate rainfall.  Kerala, Jharkhand and Uttar Pradesh saw many of their districts go mostly dry. 

Now, the Met Office is forecasting a pick-up in rainfall around August 18. 

India’s most affordable homes are in Ahmedabad in Gujarat.

Ahmedabad, Kolkata and Pune are the most affordable housing markets in the country, real estate consulting firm  Knight Frank India said yesterday.

The firm in its proprietary Affordability Index yesterday said higher home loan rates have reduced affordability across all markets so far in 2023. 

This is obviously not news.

What is perhaps the assessment that comparing average incomes to monthly instalments paid out, then Ahmedabad in Gujarat is the most affordable housing market.

Followed by Pune and Kolkata. 

The central bank has raised the REPO rate by 250 bps after slashing rates during the pandemic.

Higher rates have increased the EMI load by 14.4% since then. 

Two weeks ago, Anarock, another real estate consulting firm, said home loan EMIs for customers who bought properties less than Rs 40 lakh have gone up 20 per cent in the last two years due to a rise in mortgage rate.

In several cases, the total interest payable over a 20-year period would or is working out higher than the principal. Do take note of this is all I can say.

That’s it from me, do write in with your comments and feedback and also what segments you would like to see on [email protected]

Look forward to seeing you tomorrow, at the same time ! Bye for now.