S&P affirms ICICI Bank's 'BBB-' rating on improved asset quality

As S&P affirms ICICI Bank's BBB rating, an upgrade over the next one to two years is unlikely as that would require an improvement in the bank's financial profile

Affirming ratings for ICICI Bank, global rating agency Standard and Poor’s on Monday said the Indian private sector lender is likely to sustain improvements in asset quality, supported by the country's economic recovery and improved risk management.

It also retained a 'stable' outlook on the rating reflecting the view that ICICI Bank will maintain its strong market position and good capitalisation over the next 12-18 months. It has 'BBB-' long-term rating on the Indian lender.

However, an upgrade of ICICI is unlikely over the next one to two years as that would require an improvement in the bank's financial profile as well as India's credit rating.

The rating agency, in a statement, said ICICI bank's asset quality will likely continue to improve. This is despite an uneven economic recovery in India and macroeconomic challenges. 

In the base case, its weak loans --  nonperforming loans (NPLs) plus restructured loans -- will decline to 3.0-3.5 per cent of total loans over the next 12 months, from about 4.6  per cent as of March 31, 2022. Broadly stable credit conditions will support this. Credit costs should remain at about 1 per cent over the next 12-18 months.

ICICI's asset quality should remain better than the Indian sector's average and in line with international peers over the next two years. The bank's asset quality is comparable to similarly rated international peers. This follows gradual improvements over the past few years. 

ICICI has largely provided for legacy weak loans, while pandemic-related weak loans have also been manageable. Tighter risk management, along with improving operating conditions in India, should help it sustain the decline in its credit costs and weak loans, it added.

Referring to the changing inflation and interest rate scenario, S&P said the impact of higher inflation and rising interest rates should be manageable.

ICICI's better customer profile and underwriting relative to the Indian banking sector will likely limit losses from the spillover impact of geopolitical tensions. Retail loans form about 53 per cent of the bank's loan portfolio. These are well diversified among home loans, vehicle loans, and unsecured loans, including personal loans and credit cards.

A sizable portion of ICICI bank's retail loans are to relatively low-risk home loans, and within home loans a sizeable portion is to salaried professionals who have low loan-to-value ratios. This provides a cushion against higher interest rates and lower disposable income due to inflation.