S&P rating action won't impact Axis Bank, Bajaj Finance much: Experts

Experts say comfortable capital levels, strong market position positive for both

Global rating agency Standard & Poor’s (S&P’s) rating action against Axis Bank and Bajaj Finance is unlikely to have material impact on the two financiers as the overseas borrowing quotient constitutes only a nominal portion in their liability mix. However, experts said it could have some sentimental impact in the domestic markets.
 

With a notch downgrade by S&P, international issuer ratings of Axis Bank and Bajaj Finance now stand BB+, which is junk or non-investment grade. The latter indicates higher risk of potential defaults. The rationale for the rating action is challenging or worsening operating environment amid Covid-19, taking a toll on asset quality and credit cost.
 

“In our base case, we believe Bajaj Finance’s asset quality and credit costs will deteriorate over the next 12 months. We lowered our ratings on Axis to reflect our expectation that heightened economic risks facing India's banking system will affect the bank's asset quality and financial performance,” S&P said.
 

On the rating action, Axis Bank’s spokesperson said, “Axis Bank’s domestic instruments are rated AAA by CRISIL, CARE, ICRA, and India Ratings. The rating change by S&P has no bearing on the India operations of the bank, which account for approximately 90 percent of our assets.” Bajaj Finance declined to comment on the development saying “as a policy we do not comment on credit agency ratings”.

 

Prakash Agarwal, head of financial sector ratings at India Ratings, said, “The rating downgrades by S&P could impact cost of funding for overseas borrowings.” However, the overall cost of funds of Axis Bank and Bajaj Finance would not get significantly impact given lower proportion of overseas funding for these,” he added.
 

Echoing a similar opinion, Kajal Gandhi, analyst at ICICI Securities, said given the lower exposure to overseas markets rating downgrades by S&P was unlikely to have material impact on Axis Bank and Bajaj Finance.
 

According to the available data, external commercial borrowing (ECB) constitutes 4 per cent of Bajaj Finance’s overall liability mix as of March 20. Axis Bank’s overseas operations are spread over eleven international offices with branches at Singapore, Hong Kong, Dubai, Shanghai, and other places. However, the overseas operations just make up for 10 per cent in the total asset base of the bank. Scheduled commercial banks can borrow through their overseas branches and extend those funds as ECBs to Indian corporate. Banks can also borrow for domestic operations to finance export credit. Experts say cost of funds for Axis Bank borrowed through their overseas branches may become costly as a result of the rating action.
 

In FY20, ECBs surged 100 per cent to $51 billion, of which around 40 per cent was raised by NBFCs, including housing finance companies and micro finance institutions. While this was a result of risk-aversion by banks and mutual funds after IL&FS crisis in September 2018, ECBs are likely to come down in this Covid-19 era with a likely cautious approach of foreign investors.
 

What is comforting here is strong market position and solid domestic franchise of these two financiers. Gandhi says Axis Bank and Bajaj Finance still enjoy high investment-grade rating in the domestic market and have diversified funding. For instance, ICRA has assigned AA+ to AAA ratings to long-term borrowings of Axis Bank and Bajaj Finance.
 

This apart, comfortable capital levels and strong market position are amongst other positives. In fact, S&P’s stable outlook on Bajaj Finance also reflects that the company will maintain its strong market position and healthy capital levels over the next 12-18 months and adequate liquidity and funding profile. In case of Axis Bank too, the agency expects the bank to maintain its strong market position and adequate capitalisation.