NEW DELHI: Global ratings firm Fitch has revised its outlook for private sector lender Axis Bank and cut ICICI Bank’s support ratings, stating on Friday that both banks had ‘gaps’ in their risk control mechanisms.
“Both the banks exhibit gaps in risk controls. An ongoing investigation at ICICI Bank on extending a loan with a potential conflict of interest has also focused authorities’ attention on the bank’s governance,” it said, that adverse findings may create a “reputational risk”, especially if they point at broader weaknesses in management.
Consequently, the agency cut its outlook on Axis Bank’s issuer default rating to negative from stable due to high NPAs and limited capital buffers, despite capital infusion. The bank, which is currently looking for a replacement for Shikha Sharma, reported its first-ever quarterly loss in Q4 of FY18 due to provisions made for soaring bad loans.
Fitch downgraded ICICI Bank’s ‘support rating’ to ‘3’, from ‘2’, and revised its support rating down to ‘BB+’, from ‘BBB-’. However, it added that the bank’s capital buffers are better “even though it has experienced similar financial deterioration like Axis Bank in the previous few financial years”.
Fitch, which currently has a negative outlook on the Indian domestic banking sector, noted on Friday that the RBI’s new NPA resolution norms will help improve the health of the banking sector over the long-term. Present NPA ratios also indicate that there has been a “full recognition of the legacy problems”.
“We expect the internal capital generation for the sector, including the two private sector banks, to stay weak in FY19,” Fitch said, adding that larger private sector lenders have robust deposit franchises but enjoy less depositor confidence than state-owned banks due to the latter’s government ownership.