Axis Bank stock gains after Fitch affirms rating at 'BB+'

Private lender Axis Bank's stock rose as much as 2.41% to Rs 666.55 after Fitch Ratings affirmed the bank's long-term issuer default rating (IDR) at 'BB+'.

The ratings agency has maintained 'Negative' on the bank's long-term IDR.

Fitch Ratings said that Axis' long-term IDR of 'BB+' is support driven and linked to India's sovereign rating (BBB-/Negative). It is driven by its government support rating (GSR) of 'bb+', which is higher than the viability rating (VR) of 'bb'.

The GSR is one notch below the sovereign, and reflects Fitch's expectation that there is a moderate likelihood of extraordinary state support to Axis, if required. It is due to its size and systemic importance, which stems from its large and growing market share (5.1% of system assets and 4.6% of deposits at end-March 2020) and a sizeable retail deposit franchise.

"However, we regard the likelihood of support for Axis to be lower than for large state banks due to its private ownership, but to be similar to that of other large private banks," Fitch said.

Nevertheless, Axis is a systemically important bank in the view of the rating agency, and the state has a record of supporting such banks, although Axis has not required support in the past. The March 2020 rescue of Yes Bank, a mid-sized private-sector bank, reinforces its view.

The 'Negative' outlook on the long-term idr mirrors the outlook on the Indian sovereign IDR. Axis' capitalisation and leverage factor score is unchanged at 'bb', and the outlook is stable. It reflects Fitch's expectation that the bank's common equity Tier 1 (CET1) ratio would remain above 12% in the next two years, supported by improving internal accruals.

Axis' earnings and profitability factor score is maintained at 'bb', with a stable outlook to reflect Fitch's expectations that the four-year average operating profit/risk-weighted assets (OP/RWA) ratio will reach Fitch's 'bb' threshold of 1.25% by FY22 and remain above that level. Axis' OP/RWA improved to 2.2% in 1HFY22 from 1.4% in FY21. We do not see significant risks to earnings in the next one to two years, but believe that loan-impairment costs will be instrumental in driving OP/RWA, particularly when the forbearance unwinds, Fitch Ratings added.

It further said that Axis' deposit franchise has proven resilient through difficult operating conditions. The bank's stable funding and liquidity profile benefits from its retail-oriented and local-currency dominated deposit franchise and wide reach.

The bank's gross loans/customer deposits ratio of 87% has been trending down since FY15, but that could change in the near term as loan growth gains momentum. The bank's low-cost deposit ratio of 44% at end-1HFY22 compares well with that of peers while its stable liquidity position is reflected in its liquidity coverage ratio of 121% at end-1HFY22. The credit rating agency expects both variables to somewhat normalise over the medium term.

Axis Bank is a private sector bank offers the entire spectrum of financial services to customer segments covering large and mid-corporates, MSME, agriculture and retail businesses.

The private bank's net profit surged 86.21% to Rs 3,133.32 crore on 2.99% increase in total income to Rs 20,134.39 crore in Q2FY22 over Q2FY21.