S&P Global Ratings revised its outlook on Indian Bank's long-term issuer credit rating to negative from stable on Wednesday. The downgrade came amid expectations that Indian Bank’s capital, earnings, and asset quality will suffer following merger with a much weaker Allahabad Bank.
S&P views the government's rationale for the mergers, additional capital infusion, and tweaks to public sector board powers as credit positive at a system level. However, the impact varies depending on the current ratings of the individual banks and the size and financial performance of the amalgamated entities.
The rating agency expects the merger process could take up the bulk of management's bandwidth over the next 12-18 months, which could affect interim growth and profitability of the banks.
The ratings agency revised its outlook on Indian bank's 'BBB-' long-term issuer credit ratings to negative from stable, which reflects a one-in-three chance of a downgrade by one notch over the next 18-24 months.
The rating agency also stated that while the merger improves Indian Bank's market share to around 3.5% from 1.8% now, a major portion of the capital infusion it receives will go towards providing for Allahabad Bank's weak loans. As of June 30, 2019, Allahabad Bank's reported non-performing loan ratio was 17.4% and common equity tier-1 (CET-1) ratio was 9.7% against Indian Bank's NPL ratio of 7.3% and CET-1 ratio of 11.4%.
The government has allocated Rs 2,500 crore towards upfront capital infusion into Indian Bank.
"We view the merger with the weaker Allahabad bank will potentially undermine Indian Bank's asset quality and capitalisation owing to the former's high NPLs and lower common equity tier-1 ratio," S&P said. "We will lower the rating by a notch if Indian Bank's risk-adjusted capital (RAC) ratio falls below 7% on a sustained basis in addition to the anticipated deterioration in asset quality post merger."
Meanwhile, the ratings agency also revised its outlook on Syndicate Bank's 'BB+' long-term issuer credit rating to positive from stable. The outlook reflects a one-third probability that post merger with Canara Bank, the combined entity's business profile could benefit from enhanced franchise and size, and improvement in profitability in the next 18-24 months, without any material deterioration to the financial profile.
S&P also maintained a stable outlook on Union Bank's 'BB+' rating amid the view that its financial profile post merger with Andhra Bank and Corporation Bank will be similar to its current profile.