S&P Global Ratings has revised its rating outlook on Chennai-based public sector lender Indian Bank to steady from unfavorable. At the very same time, the rating agency affirmed its ‘BBB-‘ long-term and ‘A-3’ brief-term issuer credit ratings on the bank.
S&P Global Ratings stated it had revised the rating outlook to reflect its view of Indian Bank’s strengthened capital position stemming from its current equity capital raising via certified institutional investors, and its enhancing profitability.
The steady outlook reflects S&P’s expectation that the likelihood of help from the central government to Indian Bank will stay really higher more than the next 24 months. It also believes Indian Bank’s strengthened capital position should really be capable to climate asset top quality pressures though the bank maintains its monetary profile in line with its ratings.
In its view, Indian Bank is probably to keep its strong funding and liquidity profile more than the next 18-24 months.
“In our view, the stronger capital position should give the bank sufficient cushion against potential asset quality pressures from the brunt of a Covid-19 second wave, our baseline expectation is for Indian Bank’s weak loans (gross non-performing loans plus restructured loans) to stay below 12% of total loans, and credit costs not materially worse than 2%,” it stated.
The rating agency forecast that the pre-diversification threat-adjusted capital (RAC) ratio for Indian Bank to trend above 5% in spite of its assumption of 10%-12% annual credit development and elevated credit charges more than the next 12-24 months.
“We expect the bank to further increase its capitalisation to protect the balance sheet against downside risks. Indian Bank already has approval for raising equity capital of up to Rs 40 billion. We project the bank’s weak loans to stay slightly above the industry level over the current fiscal year, mainly driven by our expectation of higher loan restructuring, and then trend downward over the next 12-24 months. This is in line with our expectation for the industry,” S&P stated.
It expects Indian Bank’s credit charges to stay elevated at about 2% in fiscal years 2022 and 2023, partly due to the management’s policy of growing its reserves to increase its net non-performing loan (NPL) ratio to about 2%, from 3.5% at the finish of June 2021. The bank’s reported NPLs have continued to sequentially trend downward to about 9.7% as of June 2021, from the higher of 11.4%, following the amalgamation of Allahabad Bank. Nonetheless, its asset top quality compares unfavourably to peers such as Axis Bank, ICICI Bank, or State Bank of India.
“We project Indian Bank’s weak loans to peak at about 12% of total loans in fiscal 2022 and trend downward to about 11.5% in fiscal 2023. Over the two fiscal years, we expect the bank’s return on average assets to improve to 0.7% from 0.5%, but stay slightly below the industry average,” S&P stated.