In its rating rationale, S&P said, "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."
"We forecast ICICI Bank will maintain a risk-adjusted capital (RAC) ratio of more than 10% over the next 24 months. Our expectation factors in 13%-14% credit growth for the bank, an improvement in earnings, and sale of a stake in insurance subsidiaries over the period," S&P added.
Further, S&P stated that ICICI Bank's stressed loans (nonperforming loans and restructured loans) are likely to remain high when compared to that of international peers.
S&P also said, "We expect the bank's stressed loans to peak at 6% of total loans in fiscal 2022 (year ending March 31, 2022), lower than our estimate of 11%-12% for the Indian banking industry. We forecast ICICI Bank's credit costs will be about 2.0% of total loans in fiscal 2022 before normalizing to the long-term average of about 1.5% from fiscal 2023."
ICICI Bank's new nonperforming loans (NPLs) in S&P's view are likely to stay elevated in fiscal 2022 owing to the impact of the second wave of COVID-19 infections.
In S&P's view, localized lockdowns will hit small and midsize enterprise (SME) borrowers the most. Retail loans, especially unsecured personal loans and credit card debt, are also vulnerable. For ICICI Bank, SME loans (accounting for 4.2% of total loans), personal loans (6.7%), credit cards (2.4%) and rural loans (10%) could contribute to the increase in NPLs.
Taking note of ICICI Bank's Covid-19 related provisions to the tune of 1% of advances, S&P said that this 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. Most of ICICI Bank's retail loans are to salaried professionals and have low loan-to-value ratios (e.g. average for home loans is 65%). Moreover, 65%-75% of loans in key retail segments (such as a mortgage, vehicle, and personal loans) are to existing liability customers. ICICI Bank's aggressive write-off strategy and recovery of NPLs should also contain its stressed loans.
ICICI Bank's lower credit costs than in the past should enhance its profitability. S&P adds, "We estimate core earnings will be 1.3%-1.6% of assets over the next two years, with further upside possible from the sale of a stake in subsidiaries."
That said, the stable outlook reflects S&P's 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. Adding, S&P said, "We factor in a slight deterioration in the bank's asset quality and performance due to COVID-19."
In S&P's 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.
Despite a stable outlook, ICICI Bank stock was trading at Rs622.60 per piece down by Rs7.65 or 1.21% on Sensex.