Moody's Investors Service has upgraded the baseline credit assessments of ICICI Bank and Axis Bank, reflecting improvements in credit fundamentals, particularly asset quality.
The global rating agency has upgraded the baseline credit assessments (BCAs) to baa3 from ba1.
The upgrade of the BCAs does not result in any change in the deposit ratings because these are already at the same level as the India sovereign rating (Baa3 stable), Moody's said in a statement on Friday.
"The upgrade of the two banks' BCAs is driven by improvements in asset quality, capital, and profitability. Their asset quality has seen a significant improvement, with both the gross and net non-performing loans (NPL) ratios declining.
"Credit costs have also reduced at the same time as provision coverage has increased. Lower credit costs have resulted in higher profitability," it said.
ICICI Bank and Axis Bank's return on assets for the year ending March 2022 was 1.8 per cent and 1.2 per cent, respectively, compared to an average of 0.8 per cent and 0.4 per cent over the four years ending March 2020, it said.
ICICI Bank's profitability has also benefited from rising net interest margins as the share of the low margin international business has come down in the last four years, it added.
Both lenders have raised equity capital, resulting in significantly higher capital ratios, it said, adding the core equity tier 1 ratios of ICICI Bank and Axis Bank at end March 2022 were 17.6 per cent and 15.2 per cent respectively, compared to 13.6 per cent and 11.3 per cent at end March 2019.
However, it said, Axis Bank's proposed acquisition of Citigroup Inc's India consumer assets will result in an approximately 230 bps decline in capital at the bank.
As Axis Bank has good access to capital markets, the ratings agency expects the bank to raise capital to maintain its current capital ratios.
Axis Bank is targeting to close the acquisition by March 2023.