Moody's affirms IndusInd's ratings; places on review for downgrade

Global rating agency Moody's Ratings on Tuesday affirmed Indian private sector lender IndusInd Bank’s ratings and placed its baseline credit assessment (BCA) on review for downgrade.

 

The action comes in the backdrop of the bank's revelations about the inadequate internal controls in accounting for derivative transactions.

 

The outlook on IndusInd's long-term ratings remains stable. At present, the rating is “Ba1” for long-term (LT) foreign currency (FC) and local currency (LC) bank deposits.

 

The rating agency, in a statement, said the review for downgrade of the BCA takes into account the potential negative impact of the inadequate internal controls highlighted by the banks' accounting for derivative transactions.

 

The impact of the derivatives transactions, coupled with the ongoing stress in the retail unsecured loans, is likely to hurt the banks’ profitability, capital and funding, potentially leading to a downgrade of the BCA, it said.

 

The affirmation of IndusInd's Ba1 ratings with a stable outlook considers the bank's strong capital, core profitability and stable funding, which will help mitigate near-term risks to its standalone credit strength or BCA.

 

Moody's said if it were to downgrade Induslnd's BCA by one notch, it could consider incorporating a notch of government support, reflecting assessment of the level of systemic importance of Induslnd, thereby maintaining the Ba1 rating.

 

Beyond the accounting issue, IndusInd's potential leadership changes remain monitorable.  The Reserve Bank of India (RBI) approved IndusInd's managing director & chief executive officer's reappointment term for one year, contrary to the bank's board's proposal of three years and the usual regulatory practice of extending CEO term by three years. Recently, IndusInd's chief financial officer also resigned.

 

Furthermore, IndusInd's asset quality is experiencing some stress due to a moderation in India's economic growth and overleveraging by retail customers. The gross nonperforming loans (NPL) ratio deteriorated to 2.3per cent at the end of December 2024 from 1.9 per cent at the end of March 2024, primarily due to an increase in NPLs in the microfinance and credit card loan segment.

 

While IndusInd's NPLs are expected to increase further, the bank's proactive provisioning will limit the impact on profitability and capital.

 

“Despite these issues, we expect IndusInd's funding and liquidity to remain broadly stable, helped by the bank's domestic franchise and strong access to international funding sources. A material deterioration in the funding or liquidity will be credit negative for the ratings,” Moody's said.