We affirmed our 'BBB-' long-term and 'A-3' short-term issuer credit ratings on the India-based bank. We also affirmed our 'BBB-' long-term issue rating on ICICI Bank's senior notes, the credit ratings agency said in a statement.
S&P Global Ratings has revised the rating outlook to reflect its view that ICICI Bank will maintain its strong capital position over the next 24 months. The bank will benefit from the sale of stake in subsidiaries and gradual normalization of earnings, which should reduce risks associated with its capital position.
The ratings agency has forecasted that ICICI Bank will maintain a risk-adjusted capital (RAC) ratio of more than 10% over the next 24 months. Its expectation factors in 13%-14% credit growth for the bank, an improvement in earnings, and sale of stake in insurance subsidiaries over the period.
ICICI Bank's stressed loans (nonperforming loans and restructured loans) are likely to remain high when compared to that of international peers. We expect the bank's stressed loans to peak at 6% of total loans in fiscal 2022 (year ending March 31, 2022), lower than our estimate of 11%-12% for the Indian banking industry.
We forecast ICICI Bank's credit costs will be about 2.0% of total loans in fiscal 2022 before normalizing to the long-term average of about 1.5% from fiscal 2023. The bank's new nonperforming loans (NPLs) are likely to stay elevated in fiscal 2022 owing to the impact of the second wave of COVID-19 infections. In our view, localized lockdowns will hit small and midsize enterprise (SME) borrowers the most. Retail loans, especially unsecured personal loans and credit card debt, are also vulnerable. For ICICI Bank, SME loans (accounting for 4.2% of total loans), personal loans (6.7%), credit cards (2.4%) and rural loans (10%) could contribute to the increase in NPLs,” it added.
S&P Global further said that ICICI Bank has made COVID-19 related provisions to the tune of 1% of advances. This should help smoothen the hit from pandemic-related losses. The bank's better customer profile and underwriting relative to the Indian banking system should limit losses. Most of ICICI Bank's retail loans are to salaried professionals and have low loan-to-value ratios (e.g. average for home loans is 65%). Moreover, 65%-75% of loans in key retail segments (such as mortgage, vehicle, and personal loans) are to existing liability customers. ICICI Bank's aggressive write-off strategy and recovery of NPLs should also contain its stressed loans.
ICICI Bank's lower credit costs than in the past should enhance its profitability. S&P Global has estimated core earnings will be 1.3%-1.6% of assets over the next two years, with further upside possible from the sale of stake in subsidiaries.
The credit ratings agency could lower the ratings on ICICI Bank if the bank is unable to maintain a RAC ratio above 10% on a sustained basis. This could be due to higher credit growth than expected, a sharp rise in credit costs, or sale of stake in subsidiaries not progressing as planned.
ICICI Bank is a private sector bank. The bank had a network of 5,266 branches and 14,136 ATMs at 31 March 2021.
The private lender reported net profit of Rs 4,403 crore in Q4-2021, up 260.61% compared with net profit of Rs 1,221 crore in Q4-2020. Total income during the quarter increased by 2.2% year-on-year (YoY) to Rs 23,953.02 crore.
The scrip fell 1.77% to currently trade at Rs 619.10 on the BSE.
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