S&P affirms Indian Bank’s BBB-minus/A-3 ratings with negative outlook

Singapore: S&P Global Ratings has affirmed BBB-minus long-term and A-3 short-term issuer credit ratings on Indian Bank, and said the outlook on long-term rating is negative.

“We affirmed the ratings because we expect Indian Bank to be able to absorb a moderate deterioration in its asset quality over the next 12 months and benefit from faster-than-expected economic recovery in India,” said S&P.

“Indian Bank’s performance following its merger with Allahabad Bank has been better than we expected.” However, non-performing loans (NPLs) in India’s banking sector could rise to 10 to 11 per cent by end-March 2022 (fiscal 2022) from about 8 per cent as of June 30, 2020. An additional 3 to 8 per cent of loans could get restructured. S&P said Indian Bank’s credit costs will stay high at 2.2 to 2.9 per cent over fiscals 2021 and 2022 in line with industry forecast. The bank’s reported NPL ratio declined to 9.9 per cent of total loans as of September 30 from 11.4 per cent as of March 31.

In absence of the Supreme Court ruling barring banks from classifying any borrower as non-performing, Indian Bank’s NPL ratio would have been higher by about 55 basis points but still lower than in previous quarters.

The improvement in asset quality was helped by a six-month moratorium on loan repayment that lasted until end-August, and financial savings of borrowers. The management expects 2 to 3 per cent of Indian Bank’s loans to get restructured under the central bank’s one-time restructuring window.

On the corporate side, these are mostly loans from the hotels and tourism sectors which were hard hit by the pandemic.”We see a high risk of Indian Bank’s risk-adjusted capital ratio falling below 5 per cent 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 per cent as of September 30. The negative outlook reflects likely weakening in the lender’s capitalisation and asset quality from the Covid-19 hit.

S&P said it sees a one-in-three chance of a downgrade over the next 12 to 18 months.