Moody's upgrades ICICI Bank, Axis Bank's baseline credit assessments

Affirms Baa3 deposit ratings of both Indian private sector lenders; outlook on ratings for both banks, where applicable, remains stable

Global rating agency Moody’s today upgraded ICICI Bank and Axis Bank’s baseline credit assessments (BCA) to “baa3” indicating medium grade financial strength from “ba1” indicating speculative financial strength. The upgrade in BCA reflects improvements in credit fundamentals - asset quality, capital, and profitability.

It also affirmed the Baa3 deposit ratings of both Indian private sector lenders.

The upgrade of the BCAs does not result in any change in the deposit ratings, since the deposit ratings are already at the same level as the India sovereign rating (Baa3 stable), Moody’s said in a statement today.

The outlook on ratings for both banks, where applicable, remains stable. Strong solvency metrics limit downside risks and given that the ratings are already at the same level as the sovereign, upgrades are unlikely.

Moody’s said their asset quality has improved significantly, with both the gross and net non-performing loans (NPL) ratios declining. Credit costs have also reduced, as provision coverage has increased. Lower credit costs have resulted in higher profitability, it said.

ICICI and Axis' returns on assets for the year ending March 2022 were 1.8 per cent and 1.2 per cent respectively, compared to an average of 0.8 per cent and 0.4 per cent respectively over the four years ended March 2020.

ICICI's profitability has also benefited from rising net interest margins as the share of the low margin international business has come down in the last four years.

ICICI Bank and Axis have raised equity capital, resulting in significantly higher capital ratios. The core equity tier-1 ratio of ICICI was at 17.6 per cent in March 2022 up from 13.6 per cent in March 2019 and for Axis Bank, it was 15.2 per cent at end March 2022 up from 11.3 per cent at end March 2019.

However, the proposed acquisition by Axis of Citigroup Inc's India consumer assets will result in an approximately 230 basis points decline in capital at the bank.

“However, as Axis has good access to capital markets, we expect the bank to raise capital to maintain its current capital ratios”, Moody’s said. Axis is targeting March 2023 to close the acquisition.