Moody’s Revises IndusInd Bank’s Outlook To Negative From Stable

Moody’s Investor Service lowered its outlook on IndusInd Bank to account for the risk of further deterioration in its asset quality.

The rating agency changed its outlook to negative from stable but affirmed the private lender’s domestic and foreign currency ratings at Baa3/P3, an investment grade, according to its research report. That, Moody’s said, was driven by the bank’s strong buffers—capital and profitability—which result in strong ability to absorb asset quality stress.

The bank’s core equity tier-I ratio stood at 13.6 percent as on Dec. 31, 2019, Moody’s said. “Capital will be further boosted by around 80 basis points if the promoter shareholder group exercises its outstanding warrants,” it said. “Consequently, capital will remain a key credit strength.”

Over the last few quarters, however, the bank’s asset quality deteriorated, particularly in the corporate segment, Moody’s said. “Tight refinancing conditions for borrowers were a key trigger for the crystallisation of non-performing loans.”

Refinancing conditions remain tight, especially for weaker borrowers, it said. The bank has a relatively higher exposure to real estate than peers. That’s around 8 percent of its loan book as on Dec. 31, 2019, the rating agency said. While there have been no non-performing loans in this segment so far, this exposure to the property market remains a source of risk, given the broader stress in the real estate sector, it said.

“The bank could also be negatively impacted by the ongoing stress in the telecommunications sector,” Moody’s said.

IndusInd Bank’s total gross NPAs stood at Rs 4,578 crore as of December 2019. Of this, corporate bad loans were worth Rs 3,050 crore, according to its third-quarter investor presentation. Gross NPAs in the corporate segment stood at Rs 2,932 crore as of September 2019 out of total Rs 4,370-crore stressed loans.

Given that the outlook is negative, Moody’s said it’s unlikely to upgrade the bank’s ratings over the next 12-18 months.

The rating agency could, however, revise the outlook to stable if the bank maintains its bad loan ratios at current levels over the next 12-18 months, while demonstrating a decrease in credit costs to the levels seen before the financial year ended March 2019.

Moody’s also said the bank’s pre-provision income as a percentage of total assets, at 3.5 percent for the nine months ended December 2019, is among the highest for rated Indian banks.

High yield on its retail portfolio is a key driver of profitability. That, Moody’s said, was “sustainable”. A relatively high contribution from non-interest income from the corporate segment compared with other Indian banks as well as high trading income are other drivers of profitability, it said. “Even if these factors normalise, the bank’s profitability is sufficient to absorb an increase in credit costs.”