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Fitch Ratings affirmed the long-term issuer default ratings (IDRs) and viability ratings of ICICI Bank and Axis Bank at 'BBB-' and 'bbb-', respectively.
IDRs refers to the relative vulnerability of a company to default on its financial obligations.
The global ratings agency also revised the outlook on Axis Bank to negative from stable but maintained ICICI Bank’s outlook as stable for now.
Axis Bank’s capital buffers are less comfortable for its current rating despite raising fresh capital but does not expect the bank's earnings and non-performing asset (NPA) ratio to markedly deteriorate from current levels, Fitch said in a note released on Friday.
On the other hand, ICICI Bank's capital buffers are expected to be better "even though it has experienced similar financial deterioration in the previous few years".
However, Fitch has downgraded ICICI's Support Rating to '3', from '2', and revised downwards its Support Rating Floor to 'BB+', from 'BBB-'.
The revision takes into account the sovereign's constrained finances and our belief that a large number of weak majority government-owned banks, the note said.
The banks' Support Rating Floors and Support Ratings reflect Fitch's expectation of a moderate probability of extraordinary state support, if required, due to their private ownership and lower systemic importance relative to larger banks.
“The Negative Outlook on Axis's IDR reflects rising pressure on its standalone profile relative to banks with a viability rating of 'bbb-', stemming from heightened asset-quality stress and weak earnings,” Fitch said.
Fitch points out that both the private banks exhibit gaps in risk controls.
For ICICI, the ongoing investigation relating to the loan given to Videocon Group raises a potential conflict of interest bringing its corporate governance to the focus of various authorities.
“Adverse findings could create reputational risk, particularly if they point at broader weaknesses in management,” Fitch said adding that its intrinsic creditworthiness may come under further pressure depending on the outcome of the investigation.
Although it believes that ICICI could see improvement in earnings and its NPA ratio with more resolutions.
Banking sector outlook
Fitch already has a negative sector outlook on Indian banks. The new regulatory NPA framework announced on February 12, has accelerated bad-loan recognition given the clean-up mission. It should improve banking-sector health over the long term, it said.
Most (19 of 21) state-owned banks reported losses in the financial year ending March 2018 (FY18) and earnings at large private banks also came under significant pressure, with Axis reporting its first-ever quarterly loss.
“We expect internal capital generation for the sector, including the two private-sector banks, to stay weak in FY19,” the note said adding there is a chance of improvement if some of the 40 large NPA accounts facing insolvency proceedings are resolved in FY19, although there is a risk of legal delays.
Various National Company law Tribunals (NCLTs) constitute 40-50 percent of NPA stock.
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