Moody's Investors Service has downgraded the rating outlook for ICICI Bank and Axis Bank to negative from stable, and revised IDBI Bank’s outlook to stable from positive. The move was driven by a potential deterioration in asset quality resulting from coronavirus related disruptions. Moody’s has also placed IndusInd Bank’s rating under review for a downgrade.

While it has affirmed the deposit rating of ICICI Bank and Axis Bank at Baa3, and of IDBI Bank at Ba2, it has downgraded the counterparty risk assessments of Axis and ICICI to Baa3(cr)/P-3(cr) from Baa2(cr)/P-2(cr), and the local currency counterparty risk rating (CRR) of Axis and ICICI to Baa3/P-3 from Baa2/P-2.

Moody’s noted that the rapid and widening spread of the coronavirus outbreak deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets.

“The Indian financial system has been one of the sectors affected by the shock, especially given the already weakening operating environment. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on four financial institutions listed above of the breadth and severity of the shock, and the deterioration in credit quality it may trigger,” Moody’s rating rationale read.

The economic shock resulting from the nationwide lockdown will exacerbate existing negative pressure on asset quality from the already deteriorating operating environment prior to the outbreak, the ratings agency said.

Given the limited liquidity buffers small and medium-sized enterprises (SMEs) maintain Moody's expects the quality of loans to these segments by ICICI and Axis will deteriorate, it added.

Moreover, the asset quality of retail loans, especially the unsecured retail loans, is expected to deteriorate as incomes of numerous borrowers is lost or reduced due to the lockdown. This may add stress to retail-focussed lenders like ICICI Bank and Axis Bank, the ratings agency said.

Moody’s Investors Service on Thursday had changed the outlook for the Indian banking sector from stable to negative, citing the coronavirus-related impact on asset quality across sectors.

IndusInd Bank recently disclosed that it had lost 10-11 percent of its deposits due to bulk withdrawals since the Yes Bank crisis, and said it could see some impact due to the lockdown due to disruptions in business activity and collections, but has not revised its credit cost outlook for the year. RBL Bank said it would see some hit, and a slight uptick in credit costs for the financial year due to the economic impact related to COVID-19, and Kotak Mahindra Bank also gave a similar signal in its analyst con-call this week.

Moody’s noted that even large corporates will not be immune to the outbreak, which has the potential to reverse the improving trend in credit metrics.

For IDBI, Moddy’s said, the incremental impact on asset quality will be cushioned by its very low new business origination over the last few years. However, its weaker underwriting increases asset quality risks in this environment.

It has affirmed the deposit ratings of ICICI Bank and Axis Bank at Baa3, and of IDBI Bank at Ba2.

Moody's says both ICICI and Axis maintain strong capital, with a common equity tier 1 (CET1) ratio of 13.2% and 13.8% respectively at the end of December 2019. Both also have high core profitability, providing them with capacity to absorb higher credit costs, said Moody’s.

“Their funding has a high contribution from stable retail deposits and will remain resilient even in an environment of increased risk aversion. Given the above factors, there will have to be a significant deterioration in asset quality to erode these buffers” it noted.

It also noted that IDBI Bank's funding profile has improved significantly, with the proportion of funding from retail deposits significantly increase, and bulk deposits coming down from 33 percent in March 2018 to 17 percent as of December 2019, bringing some comfort.

On IndusInd Bank, Moody’s noted downside risks to asset quality amid the deteriorating macroenvironment and financial market volatility.

It said that IndusInd Bank's loan portfolio includes a higher proportion of micro finance and vehicle finance loans than its peers, which are at high risk of being negatively impacted by the economic shock.