ICICI Bank 'BBB-' Rating Affirmed On Improved Asset Quality; Outlook Stable




Jun 27, 2022 04:55 pm

S&P Global Ratings on Jun 24, 2022 affirmed its 'BBB-' long-term and 'A-3' short-term issuer credit ratings on ICICI. At the same time, we affirmed our 'BBB-' long-term issue rating on the bank's senior unsecured notes.


ICICI bank's asset quality will likely continue to improve.


This is despite an uneven economic recovery in India and macroeconomic challenges. In our base case, the bank's weak loans, defined as nonperforming loans (NPLs) and restructured loans, will decline to 3.0%-3.5% of total loans over the next 12 months, from about 4.6% as of March 31, 2022. Broadly stable credit conditions will support this. Credit costs should remain at about 1% over the next 12-18 months.


ICICI's asset quality should remain better than the Indian sector average and in line with international peers over the next two years. The bank's asset quality is comparable to similarly rated international peers. 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 impact of higher inflation and rising interest rates 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% of the bank's loan portfolio. These are well diversified among home loans, vehicle loans, and unsecured loans, including personal loans and credit cards.


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 (e.g. the average for home loans is 60%). This provides a cushion against higher interest rates and lower disposable income due to inflation. The bank has created contingency provisions (other than provisions for standard assets) amounting to 0.8% of gross advances. This should also help smoothen the hit from any moderate rise in credit stress.


ICICI has adequate capital buffers to support its above-average growth.


We estimate the bank's RAC ratio will dip marginally below 10% over the next 18 months, from 10.4% as of March 31, 2022. Despite the decline, its capitalization is likely to remain better than most Indian peers. The decline will reflect credit growth of 17%-20% that we expect amid a strong economic recovery. Although returns on assets are likely to be healthy at 1.8%-1.9%, they would not be sufficient to sustain a RAC ratio above 10%. 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.


The stable outlook reflects our view that 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 capitalization over the next 12-18 months, supported by healthy earnings.


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.


An upgrade of ICICI is unlikely over the next one to two years. This is because an upgrade will require an improvement in the bank's financial profile as well as the credit rating on India. Our assessment of ICICI's stand-alone credit profile could improve if its RAC ratio improves to over 10% on a sustained basis, while the bank maintains strong earnings quality and better-than-peers asset quality.