S&P said the management expects 2%-3% of the loans to get restructured under the central bank's one-time restructuring window.
S&P Global Ratings on Thursday affirmed its ‘BBB-‘ long-term and ‘A-3’ short-term issuer credit ratings on Indian Bank while pointing out that the outlook on the long-term rating was negative. The agency said it has removed the ratings from CreditWatch, where they were placed with negative implications on June 26, 2020.
S&P said it affirmed the ratings because it expects 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. “Indian Bank’s performance following its merger with Allahabad Bank has been better than we expected,” it said.
According to S&P’s estimate, Indian Bank’s credit costs will stay high at 2.2%-2.9% over 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 higher by about 55 basis points, but still lower than in previous quarters.
The improvement in the asset quality was helped by a six-month moratorium on loan repayment and financial savings of borrowers.
S&P said the management expects 2%-3% of the 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 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 said.
S&P does not assign equity credit to additional tier 1 instruments issued by Indian public sector banks due to uncertainty over their ability to absorb losses on a going-concern basis.
The negative outlook reflects the agency’s view of a likely weakening in Indian Bank’s capitalisation and asset quality owing to Covid, while it sees a one-in-three chance of a downgrade over the next 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 said.