S&P upgrades outlook on Indian Bank to stable on funding, liquidity profile

The rating agency affirmed Indian Bank's "BBB-" ratingm but ruled out any upward revision in the next one to two years

Rating agency Standard and Poor's has revised the outlook on Indian Bank from “negative” to “positive” on expectation that it's capital base should be able to withstand modest asset quality pressures over the next 24 months.

Chennai-based public sector lender's capitalisation has strengthened owing to its recent equity capital raising and improving profitability. It's capital adequacy stood at 15.92 per cent in June 2021, up from 13.45 per cent in June 2020.

Indian Bank is likely to maintain its solid funding and liquidity profile over the next 18-24 months, S&P said in a statement on Friday.

The rating agency affirmed Indian Bank's “BBB-” rating. However, the agency ruled out any upward revision in the next one to two years as this would require a higher sovereign credit rating on India.

S&P Global Ratings does not rate Indian banks above the sovereign due to the direct and indirect influence a distressed sovereign has on banks' operations, including their ability to service foreign currency obligations.

"We expect the bank to further increase its capitalisation to protect the balance sheet against downside risks," it said. Indian Bank already has an approval for raising equity capital of up to Rs 4,000 crore.

The bank's weak loans are likely to stay slightly above the industry level in the current fiscal year, mainly driven by higher loan restructuring. And, then trend downward over the next 12-24 months. This is in line with our expectation for the industry, the rating agency said.

The bank's reported non-performing loans have continued to sequentially trend downward to about 9.7 per cent as of June 2021, from the high of 11.4%, following the amalgamation of Allahabad Bank. Nonetheless, its asset quality compares unfavorably to peers such as Axis Bank, ICICI Bank or State Bank of India.

Indian Bank's weak loans are expected to peak at about 12 per cent of total loans in FY22 and trend downward to about 11.5 per cent in FY23, it added.