S&P Global Ratings has upgraded the long-term issuer credit ratings of 10 major Indian financial institutions, including seven banks and three non-banking financial companies (NBFCs). This action follows S&P's upgrade of India's sovereign credit rating to 'BBB'. The upgrades reflect the agency's positive outlook on the Indian financial sector, anticipating continued economic growth, improved asset quality, and enhanced capitalization.

Key Highlights of the Upgrade

• Sovereign Rating Upgrade: S&P Global raised India's long-term sovereign credit rating to 'BBB' from 'BBB-' with a stable outlook, marking the first upgrade in 18 years. This decision was driven by India's resilient economic fundamentals and increasingly favorable monetary settings for managing inflation.

• Benefitting Institutions: The financial institutions that received long-term issuer credit upgrades include:

  • Banks: State Bank of India (SBI), ICICI Bank, HDFC Bank, Axis Bank Ltd., Kotak Mahindra Bank, Union Bank of India, and Indian Bank.
  • Finance Companies: Bajaj Finance, Tata Capital, and L&T Finance.
  • Revised Stand-Alone Credit Profiles (SACP): S&P Global also revised upward its assessment of the stand-alone credit profiles (SACP) of seven of these entities – SBI, Axis Bank, Kotak Mahindra Bank, Union Bank of India, Indian Bank, Tata Capital and L&T Finance.
  • Rating upgrade: The ratings of the 10 financial institutions have been upgraded from “BBB-/Positive/A-3” to “BBB/Stable/A-2”.
  • Other entities upgraded: S&P Global Ratings also raised its long-term issuer credit ratings on the Export-Import Bank of India (India Exim) and Indian Railway Finance Corp. (IRFC) to 'BBB' from 'BBB-'. The agency also raised credit ratings on Oil and Natural Gas Corp. Ltd. (ONGC), Power Grid Corp. of India Ltd., NTPC Ltd., and Tata Power Co. Ltd. to 'BBB' from 'BBB-'.

Factors Driving the Upgrades

• Strong Economic Growth: S&P Global expects India's financial institutions to benefit from the country's strong economic growth momentum.
• Structural Reforms: The agency noted that structural improvements, such as the recovery of bad loans and the implementation of the Insolvency and Bankruptcy Code (IBC), have contributed to the upgrades. The IBC, introduced in 2016, has tilted the balance in favor of creditors, improved payment discipline, and encouraged restructuring of viable companies.
• Improved Asset Quality and Capitalization: S&P Global anticipates that Indian banks will maintain adequate asset quality, good profitability, and enhanced capitalization over the next 12-24 months. They also highlighted that credit risks in India have declined.
• Sovereign Rating Linkage: The ratings of Indian financial institutions are closely tied to the sovereign rating, reflecting the government's direct and indirect influence over these institutions. As a result, the sovereign rating upgrade paved the way for upgrades to the financial institutions.

Impact of the Upgrades

• Enhanced Credibility: The upgrades are likely to enhance the credibility of Indian financial institutions in the global financial markets.
• Lower Borrowing Costs: Improved ratings can potentially lead to improved borrowing terms for these institutions.
• Increased Investor Confidence: The upgrades are expected to boost investor confidence in the Indian financial sector.

SBI's Performance and Upgrade

State Bank of India (SBI) also announced strong Q1 financial results, with a 12.48% YoY increase in net profit. S&P Global Ratings upgraded SBI's issuer credit rating to 'BBB/Stable/A-2' and its stand-alone credit profile to 'bbb+'. Furthermore, SBI's capital and earnings rating has been enhanced to 'Adequate'.