S&P affirms Indian Bank's 'BBB-' rating, removes from CreditWatch

Rating agency Standard and Poor’s (S&P) has affirmed ratings for Indian Bank at “BBB-” on expectation of ability to absorb a moderate deterioration in its asset quality over the next 12 months.

The Chennai-based public sector lender is expected to benefit from faster-than-expected economic recovery in India.

Rating agency removed the ratings from CreditWatch, where they were placed with negative implications on June 26, 2020. Another public sector lender Allahabad Bank was merged with Indian Bank on April 01, 2020.

Outlook on financial instrument is negative due to asset quality and capital risks. It reflects the view that the bank's capital and asset quality could deteriorate due to the Covid-19 fallout over the next 12-18 months.

Chennai-based bank's risk-adjusted capital (RAC) ratio could fall below five per cent on a sustained basis in the absence of external capital infusion, rating agency said. Its capital adequacy ratio stood at 13.64 per cent in September 2020.

“Non-performing loans (NPLs) in India's banking sector could rise to 10-11 per cent by end-March 2022 (fiscal 2022), from about 8% as of June 30, 2020. We also forecast that an additional 3-8 per cent of loans could get restructured”, S&P said.

The lender’s credit costs will stay high at 2.2-2.9 per cent over fiscals 2021 and 2022, in line with our industry forecast. It reported that NPL ratio declined to 9.9 per cent of total loans as of Sept. 30, 2020, from 11.4 per cent as of March 31, 2020. In the absence of the Supreme Court ruling barring banks from classifying any borrower as non-performing, Indian Bank's NPL ratio would have been higher by about 55 basis points but still lower than in previous quarters.

The improvement in asset quality was helped by a six-month moratorium on loan repayment that lasted until end-August, and financial savings of borrowers.

Management expects 2-3 per cent of Indian Bank's loans to get restructured under the central bank's one-time restructuring window, S&P said.