S-P upgrades Axis Bank's long term issuer rating from 'BB+' to 'BBB-'

The upgrade reflects Indian private lender's good asset quality and expectation that the bank will maintain it over the next one to two years

Global rating agency Standard and Poor's (S&P) has upgraded Axis Bank's long term issuer rating from "BB+" to "BBB-" reflecting adequate financial strength.

The upgrade reflects the Indian private lender's good asset quality and expectation that the bank will maintain it over the next one to two years. The lender is now in the investment grade category.

The stable outlook on Axis Bank reflects the view that the bank will maintain its strong market position in India's banking sector over the next two years.

Axis Bank should be able to maintain its good asset quality, supported by stable macroeconomic conditions in India and the bank's well-developed risk management system, S&P said in a statement on Tuesday.

India's robust economic growth should support creditworthiness. The lender's weak loans comprising non-performing loans and standard restructured loans could decline to 2.5-3 per cent by end-March 2023, from 3.7 per cent as of March 31, 2022.

Bank's COVID restructured loans have also fallen to 0.4 per cent of total loans as of end-September 2022, from 0.6 per cent as of December 31, 2021. Credit costs could likely stay below 1 per cent while asset quality risks remain contained, the agency said.

Capacity to absorb higher inflation & interest rates impact

The small and mid-size enterprise sector and low-income households are vulnerable to rising interest rates and high inflation. However, in the base case, Axis Bank can manage risks from moderate interest-rate hikes. The bank's ample provisioning and capital buffers can help absorb a moderate rise in credit stress, S&P said.

The bank's tighter risk management should also support credit quality. Axis Bank's asset quality is likely to stay better than the Indian banking sector's average and comparable to that of similar rated international peers over the next two years. This follows gradual improvements in recent years with a resolution and recovery of legacy weak loans.

The bank's capitalisation should stay comfortable, notwithstanding an expected decline from the acquisition of Citigroup Inc.'s retail portfolio in India. Steady growth in Axis Bank's retail deposit base as well as good access to capital markets should support its funding profile.

An upgrade of Axis Bank is unlikely over the next one to two years as this will need an improvement in it's financial profile and the sovereign credit rating on India, S&P added.