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10 December, 2018 01:49 IST
Fitch affirms at Axis Bank and ICICI Bank's issuer rating at BBB-
Source: IRIS | 15 Jun, 2018, 03.36PM
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Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) and Viability Ratings of ICICI Bank (Q,N,C,F)* and Axis Bank at (Q,N,C,F)* 'BBB-' and 'bbb-', respectively, and has revised the Outlook on Axis to Negative, from Stable. Fitch has also downgraded ICICI's Support Rating to '3', from '2', and revised its Support Rating Floor to 'BB+', from 'BBB-'. The Outlook on ICICI is Stable.

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. Its capital buffers are less comfortable for its current rating despite raising fresh capital. ICICI's capital buffers are better even though it has experienced similar financial deterioration in the previous few years.

Both banks exhibit gaps in risk controls. An ongoing investigation at ICICI on extending a loan with a potential conflict of interest has also focused the authorities' attention on the bank's governance. Adverse findings could create reputational risk, particularly if they point at broader weaknesses in management. Absent material adverse findings, Fitch expects ICICI's financial profile to hold up in the near- to medium-term and this underpins the Stable Outlook on its IDR.

Fitch has a negative sector outlook on Indian banks. The new regulatory non-performing loan (NPL) framework that has accelerated bad-loan recognition is part of a clean-up that should improve banking-sector health over the long term. However, most state 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.

Sector NPL ratios (private-sector banks: 5.2%; system: 12.1%) are closer to what we believe would be full recognition of legacy problems. This includes higher NPL ratios in certain sectors, such as corporates. There is a chance of improvement if some of the 40 large NPL accounts in the insolvency courts - which constitute 40%-50% of NPL stock - are resolved in FY19, although there is a risk of legal delays.

Indian banks' solid and resilient funding and liquidity positions remain unchanged despite asset quality and earnings stress. The larger private-sector banks have robust deposit franchises but enjoy less depositor confidence than state-owned banks due to the latter's government ownership; this could lead to greater changes in funding costs and liquidity in an extreme scenario.

Shares of the Axis Bank declined Rs 2.45, or 0.46%, to trade at Rs 529.30. The total volume of shares traded was 428,006 at the BSE (3.21 p.m., Friday).

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