The agency said the economic recovery will be U-shaped, the risks for the banking sector remain on the downside and also warned of some rating downgrades because of the pandemic.
It can be noted that since late 2014, with the asset quality review, the going has been difficult for the Indian banks which are now saddled with toxic debt of nearly Rs 10 lakh crore. Slower economic growth in the days leading to the outbreak was making a recovery difficult.
"We expect Indian banks' asset quality to deteriorate, credit costs to rise, and profitability to decline," the agency said in a note.
The agency added that it has revised the economic risk trend for the banking system to negative from stable earlier.
The outlooks on both Axis Bank and ICICI Bank have also been revised down to "negative" largely due to the impact of the economic headwinds that they will be facing, but spared their peers like largest private sector lender HDFC Bank and Kotak Mahindra Bank.
Ratings on both Axis Bank and ICICI Bank have been affirmed at the existing ones.
"The negative outlook on ICICI Bank reflects our view that the bank is exposed to economic headwinds faced by India's banking system," it said, adding that the bank will maintain its strong market position and despite a deterioration, asset quality will also be better.
On the outlook change for Axis Bank, it said, "The negative outlook on Axis reflects our expectation that heightened economic risks facing India's banking system will likely affect the bank's asset quality and financial performance."
Axis Bank cannot get support from the government like the one which state-run lenders can enjoy, it said.
The agency warned that it would downgrade both Axis Bank and ICICI Bank if stressed assets rise significantly beyond the system average over the next few quarters, and up the outlook to stable if the economic risks in India abate.
In the case of HDFC Bank, it appreciated strong business franchise, better liquidity profile, comfortable capitalisation supported by strong earnings and the system-best asset quality, and added that the rating is capped by the sovereign rating.
Kotak Mahindra Bank's robust capitalisation, strong management, and better than peers asset quality was also appreciated while affirming the ratings. AA ANSANS