Moody's cuts outlook on Indian banks over asset quality concerns

Moody's Investors Service on Friday placed private sector lender Indusind Bank's ratings under review for downgrade and cut its outlook on ICICI Bank, Axis Bank and IDBI Bank by a notch due to asset quality concerns in the current challenging times.

The global ratings agency also affirmed the deposit ratings of ICICI Bank, Axis Bank and IDBI Bank.

The ongoing COVID-19 crisis is bound to have a major impact on various sectors, including banks, according to experts. The RBI has already moved by offering a three-month moratorium on loan repayments.

The review for downgrade of IndusInd's ratings reflects the downside risks to asset quality amid the deteriorating macro environment and financial market volatility, the agency said in a note.

The proportion of microfinance and vehicle finance for IndusInd Bank is higher than the peers and these loans have a high risk of getting impacted due to the current stress as they have limited capacities to repay, it said.

The bank's funding is also weak when compared to other rated Indian banks, as reflected by its high deposit concentration and low share of retail deposits, the agency said, adding this makes the bank more susceptible to the dislocations in the financial markets, including on wholesale funding sources.

Meanwhile, the outlook on Axis Bank and ICICI Bank's ratings has been revised down to negative from stable, while the same for the LIC-run IDBI Bank has been made "stable" from "positive" earlier.

The agency attributed that the changes in outlook are driven by potential deterioration in asset quality.

"The economic shock, resulting from the nationwide lockdown will exacerbate existing negative pressures on asset quality from the already deteriorating operating environment prior to the outbreak," it explained.

ICICI Bank and Axis Bank may stand to suffer because of their exposures to the small and medium enterprises, given the fact that such businesses have limited liquidity buffers to withstand difficulties, it said.

The rating agency also said that retail loans, especially the unsecured ones like credit cards can also face reverses if the salaries of borrowers suffer as a result of the lockdown.

For IDBI Bank, it acknowledged that very low new business origination provides a cushion, but flagged risks from poor loan underwriting standards.

The agency has also lowered its assumption of systemic support for ICICI Bank and Axis Bank to 'moderate' from 'high', resulting in a one-notch downgrade of their counterparty risk assessments and local currency counterparty risk rating, it said.