MUMBAI: Fitch Ratings downgraded long-term Issuer Default Rating (IDR) of top private banks ICICI and Axis Bank by a notch on Monday. Fitch, in two separate ratings reports, said the IDR ratings are being downgraded to BB+ from BBB- and its Viability Rating to bb+ from bbb-, stating the outlook for the same are stable. At a time when the banking sector is looking up after a series of bad loan clean-ups comes the ratings downgrade, due to the challenges Fitch said the banks face in their operating environment. This, it said, followed a review of the banking sector’s performance, particularly in the last three years, the regulatory framework, as well as the outlook in the near term.
“Fitch believes that the performance of Indian banks has largely bottomed out, but the sector is still struggling with poor asset quality and weak core capitalisation,” it said. Fitch said the midpoint for India’s operating environment is downgraded to bb- from bbb- and compared India with other Asian sovereign jurisdictions rated in the BBB category, including GDP per capita and ease-of-doing business ranking.
“We concluded the sector will perform below the average of its peers over the next one to two years in spite of our expectations of high economic growth and improving business prospects in India,” Fitch said. Banks, which are the biggest credit intermediaries, are positioned to take advantage of the opportunity, provided their “damaged balance sheets are remediated sustainably with fresh equity that encourages them to support growth in a meaningful way”.
In the case of Axis, Fitch said, the VR reflects its relatively weak core capitalisation and asset quality. Even if it shows improvement in the near term, it does not commensurate with the ratings agency’s expectation of higher-rated entities’ operating environments, viewed as broadly comparable to that of Indian banks.
On ICICI Bank, it noted, “governance issues have been somewhat put to rest by a change in leadership. The new management has focused on the bank’s performance since taking over and has managed its reputation risk thus far”. It also noted the regulatory audits that forced banks to recognise NPAs and related provisions leading to divergence between the bank’s and the regulator’s figures.
While the overall NPAs for the banks fell from December 2018 levels to March 2018, indicating the performance has bottomed out, it still flagged the poor asset quality and weak core capitalisation. “Capital buffers are still assessed by Fitch as moderate, including for private sector banks, especially in light of their high impaired loan ratios, high risk appetite and the challenging but competitive operating environment,” Fitch said.