S-;P revises outlook on Axis Bank, likely to sustain improvements in asset quality; Stock rallies over 1%

27 Jan 2022 , 11:32 AM

S&P Global Ratings has revised the outlook on Axis Bank to positive from stable. However, S&P has affirmed its ‘BB+’ long-term and ‘B’ short-term issuer credit ratings on the bank. Also, the rating agency affirmed the ‘BB+’ long-term issue rating on the bank’s outstanding debt.

In its statement, S&P said that the outlook revision reflects our view of a one-in-three chance that Axis Bank’s asset quality could continue to improve such that the bank’s credit costs and level of weak loans are commensurate with those of higher-rated Indian and international peers.

As per S&P, Axis Bank’s loan growth, asset quality, and profitability should improve as economic activity gains pace in India over the next two years. Under our base-case scenario, we forecast the bank’s weak loans, defined as nonperforming loans (NPLs) and restructured loans, will decline to 3.3%-3.5% over the next 12 months from about 3.8% of total loans as of Dec 31, 2021, supported by stabilizing credit conditions. Credit costs will likely moderate to 1.3%-1.5%, lower than 2.3% in fiscal 2021 (year ended March 31, 2021), given the bank has accelerated provisioning on weak loans in recent quarters.

S&P said “We expect Axis Bank to proactively recognize and provision for weak assets. Cumulative provisions covered about 2% of loans classified as standard as of Dec. 31, 2021. The bank has prudently boosted provision coverage on restructured loans with 100% provided for unsecured retail loans.”

Further, S&P outlined that “We see good growth prospects for the Indian economy over the next couple of years. However, a resurgence of COVID-19 cases remains a key risk to economic recovery. Barring major economic disruptions caused by COVID-19, the banking sector’s asset quality should start improving gradually. By our estimates, the system’s weak loans ratio has peaked, at close to 9% as of Sept. 30, 2021. That said, residual stress remains for the small to midsize enterprise (SME) and retail sectors, given that their recovery has been uneven, so far.”

S&P’s risk-adjusted capital (RAC) ratio estimate on the bank remains comfortable at 7.5%-8.5% over the next 12-18 months.

“The positive outlook reflects a one-in-three chance that Axis Bank can sustain the improvements in its asset quality over the next 12-18 months. The bank’s strong market position and stable deposit base underpin its credit profile,” S&P added.

At around 11.28 am, Axis Bank was trading at Rs760.10 per piece up by 1.08% on Sensex. The stock was near the day’s high of Rs762.65 per piece.