Rating agency Moody’s Investors Service has placed the domestic and foreign currency issuer ratings for IndusInd Bank Ltd. under review for a potential downgrade, it said in a statement on Friday. The rating action was due to the bank’s business profile, which is prone to more risks in the current macroeconomic scenario, Moody’s said.
The bank’s current issuer rating is at Baa3. Moody’s has also placed IndusInd Bank’s baseline credit assessment of ba1 under review for downgrade.
“The bank's loan portfolio includes a relatively higher proportion of micro finance and vehicle finance loans than its peers, which are at a high risk of being negatively impacted by the economic shock,” Moody’s said in its statement.
The rating agency also pointed out that IndusInd Bank’s liabilities profile has a higher concentration of expensive bulk deposits and lower retail deposits as compared with other rated Indian banks. This would mean that the bank is prone to higher risk at times of dislocation in the financial markets.
According to Moody’s, IndusInd Bank's baseline credit assessment could be downgraded if :
- There is no meaningful improvement in growth of stable sources of funding.
- Asset quality weakens, such that either bad loan ratios or credit costs increase significantly from current levels.
- There is a reduction in profitability at the pre-provisioning profit level.
Given the review for downgrade, the rating agency said that it is unlikely to improve the bank’s ratings for 12-18 months at least. However, the ratings could be affirmed at current levels if the bank is able to garner a higher proportion of retail deposits and its asset quality indicators remain stable.
Moody’s also changed the outlook for ICICI Bank Ltd. and Axis Bank Ltd. from ‘stable’ to ‘negative’ while for IDBI Bank Ltd. it was changed from ‘positive’ to ‘stable’. The change in outlook for these three banks was due to potential deterioration in asset quality.
“Moody's expects the economic shock, resulting from the nationwide lockdown, will exacerbate existing negative pressure on asset quality from the already deteriorating operating environment prior to the outbreak,” it said.
In case of ICICI Bank and Axis Bank, the rating agency believes that there will be a deterioration in the quality of loans to small and medium enterprises as well as unsecured retail borrowers. For IDBI Bank, the incremental impact on asset quality will be cushioned by its very low new business origination over the last few years. However, its weaker underwriting increases asset quality risks in this environment, Moody’s said.
Moreover the rating agency has also downgraded ICICI Bank and Axis Bank’s counterparty risk rating by a notch, after noting the government’s actions during the recent Yes Bank crisis.
“This change incorporates Moody's expectation, based on bailout of Yes Bank Limited (Caa1 Positive, ca), that government support for private sector banks will not be as forthcoming and timely as was being previously assumed,” the rating agency said in its statement.
Moody's however continues to assume a very high level of systemic support for IDBI Bank, given its continued strong links with the government. The rating agency did reaffirm the baseline credit assessment for all three banks.
Baseline credit assessment refers to key business parameters of a bank, while counterparty risk refers to the probability of default on operational obligations.
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