ICICI Bank will maintain its strong market position and market capitalisation over the next 12-18 months, S&P Global Ratings said on Monday, and affirmed its long-term issuer credit rating ‘BBB-‘ with a stable outlook. The global ratings firm said the private sector lender is likely to sustain improvements in asset quality, supported by India’s economic recovery and improved risk management. S&P Global Ratings today affirmed its ‘BBB-‘ long-term and ‘A-3’ short-term issuer credit ratings on ICICI, it said in a release.
“At the same time, we affirmed our ‘BBB-‘ long-term issue rating on the bank’s senior unsecured notes,” S&P Global Ratings said. On the stable outlook, it said ICICI will maintain a strong market position in the Indian banking sector. “We expect the bank’s asset quality to remain better than the Indian sector average and comparable to that of similarly rated international peers. The bank should maintain good capitalisation over the next 12-18 months, supported by healthy earnings. The ratings firm said that the bank has adequate capital buffers to support its above-average growth. It also estimated that the Risk-Adjusted Capital (RAC) ratio of ICICI Bank will dip marginally below 10 per cent due to strong credit growth from 10.4 per cent as of March 31, 2022.”
Despite the decline, its capitalisation is likely to remain better than most Indian peers. The decline will reflect credit growth of 17-20 per cent that we expect amid a strong economic recovery. Although returns on assets are likely to be healthy at 1.8-1.9 per cent, they would not be sufficient to sustain a RAC ratio above 10 per cent. “ICICI’s earnings can get some uplift from stake sales in subsidiaries. That said, the timing and quantity of profits from such sales are uncertain,” S&P Global Ratings said. On asset quality front, it said bank’s asset quality is likely to improve despite an uneven economic recovery in India and macroeconomic challenges. “In our base case, the bank’s weak loans, defined as Non-Performing Loans (NPLs) and restructured loans, will decline to 3.0-3.5 per cent of total loans over the next 12 months, from about 4.6 per cent as of March 31, 2022. Broadly stable credit conditions will support this. Credit costs should remain at about 1 per cent over the next 12-18 months,” it said.
ICICI’s asset quality should remain better than the Indian sector average, this follows gradual improvements over the past few years. ICICI has largely provided for legacy weak loans, while pandemic-related weak loans have also been manageable. Tighter risk management, along with improving operating conditions in India, should help it sustain the decline in its credit costs and weak loans, the global rating agency said. On the impact of higher inflation and rising interest rates, S&P Global Ratings said it should be manageable. ICICI’s better customer profile and underwriting relative to the Indian banking sector will likely limit losses from the spillover impact of geopolitical tensions. Retail loans form about 53 per cent of the bank’s loan portfolio. These are well diversified among home loans, vehicle loans, and unsecured loans, including personal loans and credit cards.
As a sizeable portion of ICICI Bank’s retail loans are to relatively low-risk home loans, and within home loans a sizeable portion is to salaried professionals who have low loan-to-value ratios, it provides a cushion against higher interest rates and lower disposable income due to inflation. On the flip side, it said: “We could lower the ratings on ICICI if its asset quality deteriorates, reversing the improvements over the last 12-18 months. This could happen if the economic recovery in India derails, resulting in asset quality pain for the bank or if the bank’s above-average credit growth results in higher latent risk.”
