The rating agency affirmed its ‘BBB-‘ long-term and ‘A-3’ short-term issuer credit ratings on ICICI Bank.
“We revised the rating outlook to reflect our view that ICICI Bank will maintain its strong capital position over the next 24 months. The bank will benefit from the sale of a stake in subsidiaries and gradual normalization of earnings, which should reduce risks associated with its capital position,” it said.
In a statement, S&P forecast that ICICI Bank will maintain a risk-adjusted capital (RAC) ratio of more than 10 per cent over the next 24 months.
“Our expectation factors in 13-14 per cent credit growth for the bank, an improvement in earnings, and sale of stake in insurance subsidiaries over the period,” it said.
ICICI Bank’s stressed loans (non-performing loans and restructured loans) are likely to remain high when compared to that of international peers.
The bank’s stressed loans are expected to peak at 6 per cent of total loans in the fiscal year ending March 2022, lower than the estimate of 11-12 per cent for the Indian banking industry.
“The bank’s new non-performing loans (NPLs) are likely to stay elevated in fiscal 2022 owing to the impact of the second wave of COVID-19 infections. In our view, localized lockdowns will hit small and midsize enterprise (SME) borrowers the most,” it said.
Retail loans, especially unsecured personal loans and credit card debt, are also vulnerable.
For ICICI Bank, SME loans (accounting for 4.2 per cent of total loans), personal loans (6.7 per cent), credit cards (2.4 per cent) and rural loans (10 per cent) could contribute to the increase in NPLs.
ICICI Bank has made COVID-19 related provisions to the tune of 1 per cent of advances.
This, S&P said, should help smoothen the hit from pandemic-related losses.
“The bank’s better customer profile and underwriting relative to the Indian banking system should limit losses,” it added.
ICICI Bank’s lower credit costs than in the past should enhance its profitability, it said estimated core earnings at 1.3-1.6 per cent of assets over the next two years, with further upside possible from the sale of stake in subsidiaries.
“The stable outlook reflects our view that ICICI Bank’s capitalization will remain strong over the next 24 months, aided by better earnings and profit from the sale of a stake in subsidiaries. We factor in a slight deterioration in the bank’s asset quality and performance due to COVID-19,” it said.
In its base case, ICICI Bank will maintain its strong market position, strong capital, better-than-system asset quality, and good funding and liquidity over the next 24 months.
“An upgrade of ICICI Bank is unlikely in the next one to two years because that would require an improvement in the bank’s financial profile as well as the sovereign credit rating on India.
“Our assessment of ICICI Bank’s financial profile may improve if the bank’s asset quality strengthens to levels in line with international peers, and it maintains its capitalization at a strong level,” it said.
