Axis Bank well-placed to face downside risks due to tough conditions: S&P

Asset quality to be weaker than HDFC Bank

Global rating agency Standard and Poor's (S&P) on Thursday said that Indian private lender Axis Bank is well positioned to withstand downside risks from tough operating conditions in India.

The bank's results for the quarter ending Sept 30, 2020 (Q2FY21) were resilient and in line with the rating outlook, said S&P.

Axis Bank's growth and earnings are likely to outperform those of public sector banks, but remain in line with its domestic private sector peers.

Bank's risk appetite, which has been subdued over the past six months, is expected to grow in line with the system average for the fiscal year ending March 31, 2021. However, it is well positioned to take advantage of a potential economic rebound and grow faster than the industry average in FY22 and FY23.

Axis Bank's asset quality should also remain better than the system average over the next two years, despite a likely deterioration from the Covid-19 pandemic.

The rating agency expects Axis Bank's asset quality to remain in line with peers such as ICICI Bank, but weaker than that of HDFC Bank.

“Axis Bank has increased its provisioning to cover losses associated with the pandemic. We expect the bank to continue to proactively recognise and provide for weak assets," the agency said. The banking sector will continue to face significant uncertainty over the next six to 12 months amid the pandemic and extraordinary support granted to borrowers.

Restructuring will delay recognition of stressed loans in India's banking sector. The sector could see 5%-8% of its total loans being restructured by the end of June 2021. In addition, nonperforming loans will increase to 10%-11% of the sector's total loans, from 8.5% as of March 31, 2020.

“We anticipate Axis Bank will have a lower proportion of restructured and nonperforming loans compared with the domestic system average, given improvements in its risk management and quality of originations over the past two years”, S&P said.

Axis Bank has ample capital and earnings to absorb incremental credit costs and support strong growth at the current rating level. The bank has demonstrated an ability to raise large amounts of capital and provision during a severe economic downturn, agency added.