Standard and Poor’s (S&P) on Wednesday revised its outlook for Indian bank Axis from “stable” to “positive”, citing the private lender’s improving asset quality.
The rating agency affirmed the bank’s long-term ‘BB+’ and short-term ‘B’ issuer credit ratings under revised criteria.
In December 2021, the agency had specified the details of the revision of the rating criteria for banks and non-bank financial institutions. It revised the Banking Sector Country Risk Assessment Standards (BICRA).
Axis is expected to maintain asset quality improvements supported by better risk management and India’s economic recovery, S&P said in a statement.
The positive outlook reflects a one-in-three chance that Axis Bank’s asset quality metrics will be on par with its higher-rated Indian and international peers over the next 12-18 months.
Axis Bank’s loan growth, asset quality and profitability are expected to improve as economic activity picks up in India over the next two years.
Under the base case, the bank’s weak lending will decline to 3.3%-3.5% over the next 12 months, from around 3.8% of total lending in December. 31, 2021. Weak loans include non-performing loans (NPLs) plus restructured loans.
Credit costs are expected to moderate to 1.3%-1.5%, less than 2.3% in March 2021, as the bank accelerated provisioning of weak loans in recent quarters.
The quality of the bank’s assets is historically lower than that of its international peers. This reflects the severe decline in corporate debt that Indian banks faced in the years before the pandemic and Axis Bank’s high exposure to distressed companies.
Axis Bank’s borrowing costs are down as weak loans inherited from the past have been largely covered and pandemic-related weak loans have been manageable.
S&P said growth prospects for the Indian economy are good over the next two years. However, a resurgence in COVID-19 cases remains a major risk to the economic recovery.
Barring major economic disruptions caused by Covid-19, the quality of banking sector assets should start to improve gradually. The system’s low loan ratio peaked at nearly 9% as of September 30, 2021. That said, residual strains remain for small and medium-sized enterprises (SMEs) and retail, given that their recovery has been uneven so far. ‘now. .
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