S&P revises Indian Bank’s rating outlook to stable from negative

In its view, Indian Bank is likely to maintain its solid funding and liquidity profile over the next 18-24 months.

S&P Global Ratings has revised its rating outlook on Chennai-based public sector lender Indian Bank to stable from negative. At the same time, the rating agency affirmed its ‘BBB-‘ long-term and ‘A-3’ short-term issuer credit ratings on the bank.

S&P Global Ratings said it had revised the rating outlook to reflect its view of Indian Bank’s strengthened capital position stemming from its recent equity capital raising through qualified institutional investors, and its improving profitability.

The stable outlook reflects S&P’s expectation that the likelihood of support from the central government to Indian Bank will remain very high over the next 24 months. It also believes Indian Bank’s strengthened capital position should be able to weather asset quality pressures while the bank maintains its financial profile in line with its ratings.

In its view, Indian Bank is likely to maintain its solid funding and liquidity profile over 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 said.

The rating agency forecast that the pre-diversification risk-adjusted capital (RAC) ratio for Indian Bank to trend above 5% despite its assumption of 10%-12% annual credit growth and elevated credit costs over 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 said.

It expects Indian Bank’s credit costs to remain elevated at about 2% in fiscal years 2022 and 2023, partly due to the management’s policy of increasing its reserves to improve its net non-performing loan (NPL) ratio to about 2%, from 3.5% at the end of June 2021. The bank’s reported NPLs have continued to sequentially trend downward to about 9.7% as of June 2021, from the high of 11.4%, following the amalgamation of Allahabad Bank. Nonetheless, its asset 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 said.