S&P Global Ratings on Thursday affirmed its ‘BBB-‘ long-term and ‘A-3’ quick-term issuer credit ratings on Indian Bank although pointing out that the outlook on the extended-term rating was adverse. The agency stated it has removed the ratings from CreditWatch, exactly where they have been placed with adverse implications on June 26, 2020.
S&P stated it affirmed the ratings simply because it expects Indian Bank to be in a position to absorb a moderate deterioration in its asset high quality more than the subsequent 12 months and advantage from more quickly-than-anticipated financial recovery in India. “Indian Bank’s performance following its merger with Allahabad Bank has been better than we expected,” it stated.
According to S&P’s estimate, Indian Bank’s credit expenses will keep higher at 2.2%-2.9% more than fiscals 2021 and 2022. The bank’s reported NPL ratio declined to 9.9% of total loans as of September 30, 2020, from 11.4% as of March 31, 2020.
In the absence of the Supreme Court ruling barring banks from classifying any borrower as nonperforming, Indian Bank’s NPL ratio would have been larger by about 55 basis points, but nonetheless reduced than in preceding quarters.
The improvement in the asset high quality was helped by a six-month moratorium on loan repayment and economic savings of borrowers.
S&P stated the management expects 2%-3% of the loans to get restructured below the central bank’s a single-time restructuring window. On the corporate side, these are largely loans from the hotels and tourism sectors, which have been really hard hit by the pandemic.
“We see a high risk of Indian Bank’s RAC ratio falling below 5% on a sustained basis if the bank’s credit costs or credit growth are higher than our forecast, especially if the bank is unable to raise commensurate common equity capital. Indian Bank’s RAC ratio was 5.2% as of September 30, 2020,” it stated.
S&P does not assign equity credit to added tier 1 instruments issued by Indian public sector banks due to uncertainty more than their potential to absorb losses on a going-concern basis.
The adverse outlook reflects the agency’s view of a probably weakening in Indian Bank’s capitalisation and asset high quality owing to Covid, although it sees a a single-in-3 opportunity of a downgrade more than the subsequent 12-18 months.
“We will lower the rating by a notch if Indian Bank’s RAC ratio falls below 5% on a sustained basis or the bank’s NPL ratio or credit costs increase sharply and we expect them to remain at that level or increase. The RAC ratio could fall below 5% if Indian Bank’s credit growth or provisioning is higher than our forecast, particularly in the absence of capital infusion. We would revise the outlook to stable if the bank’s RAC ratio can sustain above 5% and its asset quality remains comparable to similarly rated peers,” S&P stated.