Moody's has also affirmed the bank's domestic and foreign currency bank deposit ratings of Baa3/P-3, foreign currency senior unsecured rating of Baa3, foreign currency senior unsecured MTN program rating of (P)Baa3, and Baseline Credit Assessment (BCA) and adjusted BCA of ba1.
The stock is currently trading at Rs1,271.15, down by Rs21.05 or 1.63% from its previous closing of Rs1,292.20 on the BSE.
At the same time, Moody's has affirmed the bank's counterparty risk assessment (CR Assessment) of Baa3(cr)/P-3(cr), and domestic and foreign currency counterparty risk rating (CRR) of Baa3/P-3.
Moody's has changed the outlook, where applicable, to negative from stable.
The affirmation of the rating is driven by the bank's strong buffers, both capital and profitability, which result in a strong ability to absorb asset quality stress.
The bank's core equity tier 1 ratio at 31 December 2019, after factoring in profits for the nine months ended 31 December 2019, stood at 13.6%. Capital will be further boosted by around 80 basis points if the promoter shareholder group exercises its outstanding warrants. Consequently, capital will remain a key credit strength.
The bank's pre-provision income as a percentage of total assets, at around 3.5% for the nine months ended December 31, 2019, is among the highest for rated Indian banks. A key driver of the higher profitability is the high yield on its retail portfolio, which Moody's believes is sustainable. A relatively high contribution from non-interest income from the corporate segment compared with other Indian banks, as well as high trading income, are also drivers of the higher profitability. Even if these factors normalize, the bank's profitability is sufficient to absorb an increase in credit costs.
The rating also factors in the bank's moderate — although improving — funding profile. The bank has a high depositor concentration, and a low share of retail deposits compared to other rated Indian banks. At the same time, IndusInd Bank has seen strong growth in retail deposits over the last few quarters, a credit positive.
Moody's has revised the outlook to negative to account for the risk of further asset quality deterioration.
Over the last few quarters, the bank has seen a deterioration in its asset quality, particularly in the corporate segment. Tight refinancing conditions for borrowers were a key trigger for the crystallization of nonperforming loans (NPLs).
Refinancing conditions remain tight, especially for weaker borrowers. In particular, the bank has a relatively higher exposure to real estate compared to other banks (at around 8% of its loan book at December 31, 2019. While there have been no NPLs in this segment so far, this exposure to the property market remains a source of risk, given the broader stress in the real estate sector.
The bank could also be negatively impacted by the ongoing stress in the telecommunications sector.
IndusInd Bank's senior ratings continue to incorporate a one-notch of systemic support. Moody's continues to expect that IndusInd Bank will receive a moderate level of support from the Government of India (Baa2 negative) in times of need, based on its modest market share of 1.5% of system deposits as of March 31, 2019.
Moody's does not have any particular governance concern for IndusInd Bank and does not apply any corporate behaviour adjustment to the bank. Moody's views IndusInd Bank's risk management framework as consistent and commensurate with its risk appetite.