S&P upgrades outlook on Axis Bank to positive on improved asset quality

Private lender's loan growth and profitability should improve as economic activity gains pace in India, says agency.

Standard and Poor's (S&P) on Wednesday revised its outlook for India's Axis Bank from "stable" to "positive", citing improved asset quality of the privately owned lender.

The rating agency affirmed 'BB+' long-term and 'B' short-term issuer credit ratings on the bank under revised criteria.

In December 2021, the agency had set out details of revision in criteria for rating banks and non-bank financial institutions. It revised norms for Banking Industry Country Risk Assessment (BICRA).

Axis is likely to sustain improvements in asset quality supported by improved risk management and India’s economic recovery, S&P said in a statement.

The positive outlook reflects a one-in-three chance that Axis Bank's asset quality metrics could be commensurate with higher-rated Indian and international peers over the next 12-18 months.

Axis Bank's loan growth, asset quality, and profitability should improve as economic activity gains pace in India in the next two years.

According to the base-case scenario, the bank's weak loans will decline to 3.3 per cent-3.5 per cent in the next 12 months from about 3.8% of total loans as of December. 31, 2021. Weak loans comprise nonperforming loans (NPLs) plus restructured loans.

Credit costs will likely moderate to 1.3%-1.5%--lower than 2.3% in March 2021—given that the bank has accelerated provisioning on weak loans in recent quarters.

The bank's asset quality has been lower historically compared to its international peers. This reflects the severe corporate debt downturn that Indian banks faced in pre-pandemic years and Axis Bank's high exposure to stressed corporates.

Axis bank's credit costs are declining given that legacy weak loans have been largely provided for, and pandemic-related weak loans have been manageable.

S&P said growth prospects for the Indian economy are good over the next couple of years. However, a resurgence of COVID-19 cases remains a key risk to economic recovery.

Barring major economic disruptions caused by Covid-19, the banking sector's asset quality should start improving gradually. The system's weak loans ratio has peaked, at close to nine per cent as of September 30, 2021. That said, residual stress remains for the small to midsize enterprise (SME) and retail sectors, given that their recovery has been uneven, so far.