Moody’s affirms ICICI and Axis’ Baa3 deposit ratings, upgrades BCA to baa3 from ba1

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Moody’s Investors Service (“Moody’s”) has today affirmed the Baa3 deposit ratings of ICICI Bank Limited (ICICI) and Axis Bank Ltd (Axis). At the same time Moody’s has upgraded both the banks’ baseline credit assessments (BCA) to baa3 from ba1 reflecting improvements in credit fundamentals, in particular asset quality. The upgrade of the BCAs does not result in any change in the deposit ratings because the deposit ratings are already at the same level as the India sovereign rating (Baa3 stable).

Axis Bank Limited, GIFT City Branch’s preferred stock non-cumulative bond rating has been upgraded to Ba3(hyb) from B1(hyb), driven by the BCA upgrade.

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

The upgrade of the two banks’ BCAs is driven by improvements in asset quality, capital, and profitability.

Their asset quality has seen a significant improvement, with both the gross and net non-performing loans (NPL) ratios declining. Credit costs have also reduced at the same time as provision coverage has increased. Lower credit costs have resulted in higher profitability.

ICICI and Axis’ return on assets for the year ending March 2022 was 1.8% and 1.2% respectively, compared to an average of 0.8% and 0.4% respectively over the four years ending 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 and Axis have raised equity capital, resulting in significantly higher capital rations. The core equity tier 1 ratios of ICICI and Axis at end March 2022 were 17.6% and 15.2% respectively compared to 13.6% and 11.3% at end March 2019.

However, the proposed acquisition by Axis of Citigroup Inc.’s (Citi, A3 stable) India consumer assets will result in an approximately 230bps 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. Axis is targeting March 2023 to close the acquisition.

Funding and liquidity remain credit strengths of the banks, with both being majority funded by retail deposits. Liquidity coverage ratios of both the banks are comfortably above the regulatory minimums.