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Citing an improvement in the asset quality of Axis Bank, global ratings agency Standard and Poor's (S&P) has upgraded the outlook on the private sector lender from 'stable' to 'positive'.
In its report, S&P Global Ratings has affirmed 'BB ' long-term and 'B' short-term issuer credit ratings on the bank. The global ratings agency has also affirmed the 'BB ' long-term issue rating on the bank's outstanding debt.
In December last year, S&P had set out details of revision in criteria for rating banks and non-bank financial institutions. It revised norms for Banking Industry Country Risk Assessment (BICRA).
Axis is likely to sustain improvements in asset quality supported by improved risk management and India’s economic recovery, S&P's statement read.
"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," the report said.
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 per cent over the next 12 months from about 3.8 per cent of total loans as of December 31, 2021, supported by stabilising credit conditions, it said.
"Credit costs will likely moderate to 1.3-1.5 per cent, lower than 2.3 per cent in fiscal 2021 (year ended March 31, 2021), given the bank has accelerated provisioning on weak loans in recent quarters," the ratings agency added.
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.
On upside scenario, S&P said, "We could raise our ratings on Axis Bank if the bank's asset quality improves sustainably such that it is commensurate with higher-rated Indian and international peers' over the next 12-18 months."
S&P also said that growth prospects for the Indian economy are good over the next couple of years. However, a resurgence of coronavirus cases remains a key risk to economic recovery.
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