Fitch downgrades ICICI Bank rating from BBB- to BB+ amid banking distress

Global rating agency Fitch said Monday it has downgraded ICICI Bank by a notch as financial health of the private sector banks has weakened.

The rating action comes amid the challenges the bank faces in its operating environment, Fitch Ratings said in a statement.

"Fitch Ratings has downgraded ICICI Bank Limited's Long-Term Issuer Default Rating (IDR) to 'BB+' from 'BBB-' and its Viability Rating to 'bb+' from 'bbb-'. The Outlook on the IDR is Stable," it said.

It has also affirmed ICICI's Support Rating at '3' and Support Rating Floor at 'BB+', it said.

BB rating indicates speculative grade while BBB points at good credit quality.

Fitch lowered its midpoint for India's operating environment to 'bb+' from 'bbb-' following a review of the banking sector's performance, particularly in the last three years, and its regulatory framework, as well as the outlook in the near term.

"We also compared India with other sovereign jurisdictions in Asia rated in the 'BBB' category including the key metrics of GDP per capita and the ease-of-doing-business ranking," it said.

It 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.

The performance of Indian banks should have largely bottomed out, but the sector is still struggling with poor asset quality and weak core capitalisation, it said.

"We estimate that Indian banks' impaired-loan ratio declined to an average of 10.8 per cent by 9 months of 2019-20 from 11.5 per cent in the financial year ended March 2018 (FY18), which continues to be high by global standards," it said.

Capital buffers are assessed by Fitch as moderate, including for private-sector banks, especially in light of their high impaired-loan ratio, risk appetite and the challenging but competitive operating environment, it said.

Fitch further said ICICI Bank's core capitalisation is higher than that of most other Indian banks but within the current operating environment poses only a moderate buffer against risks.

That said, Fitch believes the bank has some capital fungibility through the sale of stakes in profitable subsidiaries and the repatriation of excess capital from foreign subsidiaries.

Its impaired-loan ratio is weaker than that of other large private banks and most banks with Viability Ratings in the 'bb' category, even though the measure has improved slightly to 7.5 per cent in 2019-20 from 10 per cent in the previous fiscal, it added.