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"We affirmed the ratings to reflect our view that a fresh equity raising by Axis Bank has strengthened its capital," said S&P's credit analyst Amit Pandey.
S&P raised Axis Bank's standalone credit profile to 'bbb' from 'bbb-'. However, it does not rate the bank above the foreign currency sovereign rating on India (unsolicited ratings BBB-/Negative/A-3) because most of the bank's operations are in India and, in our view, the bank cannot withstand the stress associated with a sovereign default.
The agency revised its assessment of Axis Bank's capital and earnings to 'adequate' from 'moderate', as our criteria define these terms. We expect the fresh equity issuance to increase the bank's equity base by 20 per cent. Axis Bank raised Rs 5,540 crore through a qualified institutional placement (QIP) and preferential allotment.
As per S&P, Axis Bank's loan growth will moderate from historically high rates. Profitability could decline because of potentially higher credit costs, given the economic challenges in India. However, Axis Bank's profitability should remain above the industry average.
Following the equity issuance, the rating agency expect the Axis Bank's risk-adjusted capital ratio before diversification adjustments to improve and remain above 7 per cent over the next 24 months. "The negative outlook on Axis Bank reflects the outlook on the ratings on India," said Pandey.
Pandey further added that S&P could downgrade the bank if it downgrades the sovereign. "We could lower the standalone credit profile if Axis Bank's asset quality deteriorates more than we expect or if the bank's rapid growth causes its risk-adjusted capital ratio before diversification adjustments to fall below 7 per cent," he said. S&P could revise the outlook to stable if it takes a similar action on the sovereign.
