S&P downgrades Axis Bank and four NBFCs

The rating agency also put Indian Bank on credit watch with negative implications.

S&P Global Ratings on Friday said that it has downgraded Axis Bank, Bajaj Finance, Shriram Transport Finance Company, Manappuram Finance and Power Finance Corporation (PFC) on worsening operating conditions following the Covid-19 outbreak, which has increased risks for banks and financial institutions operating in India. The rating agency also put Indian Bank on credit watch with negative implications, as it expects the public sector bank’s (PSB) credit profile to weaken over the coming quarters due to Covid-19, as well as the merger with the weaker Allahabad Bank.

“We believe risks stemming from challenging operating conditions following COVID-19 have increased for Indian banks. We now expect the Indian economy to fall into recession in the current fiscal year,” S&P said, adding that the asset quality of Indian finance companies is set to deteriorate, with credit costs rising and profitability declining over the next 12 months. “Given the large acceptance of moratorium by borrowers, funding and liquidity problems could worsen for these companies,” it said.

The ratings on Axis Bank’s issuer credit rating was lowered to BB+/Stable/B from BBB-/Negative/A-3 to reflect S&P’s expectation that heightened economic risks facing India’s banking system will affect the bank’s asset quality and financial performance. “While Axis’ asset quality is superior to the Indian banking sector average, its level of nonperforming assets (NPAs) will likely remain high compared to international peers’. Nevertheless, we expect the bank to maintain its strong market position and adequate capitalization,” S&P analysts said.

The stable outlook reflects that the ratings on Axis Bank already factor in some deterioration in the bank’s asset quality and performance over the next 12 months. The ratings could be lowered further if the bank’s stressed assets rise significantly beyond the system average over the next few quarters.

Bajaj Finance underwent a similar rating downgrade to reflect weaker operating conditions faced by Indian financial institutions. “In our base case, we believe the company’s asset quality and credit costs will deteriorate over the next 12 months,” S&P said. The agency has not factored in any extraordinary support from the Bajaj group into its rating on Bajaj Finance because the group entities are regulated or listed entities. They are, therefore, restricted in their ability to support Bajaj Finance in the case of an extraordinary event.

Manappuram Finance was downgraded to B+/Stable/B from BB-/Negative/B to reflect the heightened risks associated with economic conditions in India and their high impact on the microfinance segment. “That said, the gold-backed loan business has held up relatively well under these conditions,” S&P observed.

Shriram Transport was downgraded to BB-/Watch Neg/B from BB/Negative/B and placed the ratings on credit watch because on expectations that challenging operating conditions in the Indian financial sector will lead to asset quality and liquidity stress for the company over the next 12 months. “STFC’s dominant market position as India’s largest commercial vehicle financier and its strong capitalization continue to support the ratings. STFC’s plan to raise Indian rupee (INR) 15 billion through a rights issue over the next 30-40 days will bolster its capital position,” S&P said.

PFC was downgraded to BB+/Stable — from BBB-/Negative — to reflect the weakening general economic conditions in India. The power sector was severely hit by Covid-19 due to a decline in manufacturing demand and additional collection challenges for distribution companies that were already structurally weak. “In our view, the government’s INR900 billion package to help distribution companies provides only a temporary liquidity solution and doesn’t address fundamental issues with the creditworthiness of the sector,” analysts at S&P wrote.