OREANDA-NEWS. S&P Global Ratings said today that it had affirmed its 'BBB-' long-term and 'A-3' short-term issuer credit ratings on Indian Bank. The outlook on the long-term rating is stable.

"We affirmed the rating because we expect Indian Bank to maintain its above-average funding profile, strong liquidity, and adequate capitalization and business franchise over the next 18-24 months," said S&P Global Ratings credit analyst Nikita Anand. "The bank's deteriorating asset quality owing to stress faced by its corporate borrowers tempers these strengths."

We continue to see a very high likelihood that the government of India (BBB-/Stable/A-3) will continue to provide timely and sufficient extraordinary support to the bank. Our view of a very high likelihood of extraordinary government support is based on our assessment of the bank's very strong link with, and very important role to, the government.

We expect Indian Bank to maintain its satisfactory domestic business franchise, and business and geographic diversification, which support our assessment of the bank's business position.

Our assessment of Indian Bank's capital and earnings reflects our expectation that the bank's pre-diversification risk-adjusted capital (RAC) ratio will remain at 7.5%-8% over the next 12-18 months; the ratio is 8.3% as of March 31, 2016. The bank's RAC ratio continues to be better than that of rated public sector banks. Indian Bank's profitability has reduced in recent years because of margin pressure and increasing credit costs stemming from a rise in nonperforming loans (NPL). That said, Indian Bank's operating performance in fiscal 2016 (ending March 31, 2016) was better than peers', many of which reported losses. Indian Bank's Tier-1 capitalization is better than that of other public sector peers and is comfortably above the regulatory minimum requirement. The bank has the flexibility to raise capital, if required, by diluting the government's 82.1% stake.

We expect Indian Bank's asset quality to remain stressed over the next 12-18 months due to asset concentration in corporate borrowers (52% of loan portfolio), especially in stressed segments such as infrastructure and metals. The bank's gross NPL ratio increased to 7.0% as of June 30, 2016, from 4.4% as of March 31, 2015. The ratio is marginally better than the industry average. Indian Bank's standard restructured loans stood at 4.8% of gross loans as of March 31, 2016, and remained higher than most rated peers'. A part of standard restructured loans are to state electricity boards, where we expect the losses to be limited. Nevertheless, slippages from stressed segments and restructured loans are likely to keep the bank's credit costs elevated over the next 12-18 months.

We expect Indian Bank's funding and deposit ratios to remain better than peers'. The bank's liquidity ratios are stronger than several global peers', with a ratio of broad liquid assets to short-term wholesale funding of 17.8x as of March 2016.

"The stable outlook for the next 18-24 months on Indian Bank reflects our expectation that the likelihood of government support to the bank will remain very high," said Ms. Anand. "We also anticipate that the bank will maintain its above-average funding and strong liquidity profile over the period. The bank's adequate capital position should help it to weather asset-quality pressures and maintain a financial profile in line with the rating."

We could downgrade Indian Bank if we lower the sovereign credit rating. We could lower our assessment of Indian Bank's stand-alone credit profile (SACP) to 'bb+' from 'bbb-' if the bank's asset quality weakens significantly or the pre-diversification RAC ratio falls below 7% on a sustained basis. The RAC ratio could deteriorate if the bank grows aggressively and is unable to support this growth with sufficient capital infusion, or if the economic risk in India rises. However, the rating may not be affected due to a very high likelihood of government support. The bank's SACP would have to move down by two notches for the rating to be lowered. We believe such a scenario is unlikely for the next 18-24 months.

We could raise the rating on Indian Bank if we raise the sovereign credit rating on India and the bank's SACP does not deteriorate. S&P Global Ratings does not rate Indian banks above the sovereign rating because of the direct and indirect influence the sovereign in distress would have on a bank's operations, including its ability to service foreign currency obligations. Given the stable outlook on India, a change in the rating on Indian Bank is unlikely over the next 18-24 months.