Two major Indian lenders slumped in the bond market after their credit ratings were cut to junk by Fitch Ratings, in the latest sign of concerns about the nation’s banks that are battling the world’s worst bad-loan ratio.

Fitch lowered its long-term issuer default ratings on ICICI Bank Ltd. and Axis Bank Ltd. to BB+ from BBB- late on Monday. Certain dollar bonds from ICICI slumped the most in more than a year, while ones from Axis Bank fell the most in over six months on Tuesday.

“We expect the performance of India’s banking sector to be below average over the next one to two years despite our expectations of high economic growth and improving business prospects," Fitch said in a statement Monday. “The sector is still struggling with poor asset quality and weak core capitalization."

What happened

ICICI Bank’s 3.25% notes due 2022 fell 0.5 cent, the most in over a year, to 99.7 cents on the dollar, according to data compiled by Bloomberg. Axis Bank’s 3.25% due 2020 dropped 0.2 cent, the most in over six months, to 100. Fitch said that the performance of Indian banks has largely bottomed out but the sector is still addressing poor asset quality and weak core capitalization. The rating company said that ICICI’s key financial indicators are generally weaker than those of banks rated higher. ICICI Bank and Axis Bank have investment-grade ratings from other credit assessors.

Analysis

Nomura sees Fitch’s move as “harsh and backward-looking" as the rating’s company has cut the scores at a time when both these banks have reported a decline in gross non-performing assets in their FY19 financial results. “We agree that the operating environment for Indian banks will remain challenging, notwithstanding the recent positive election outcome which saw PM Narendra Modi return to power with an increased majority, which along with relatively rich valuations, is why we continue to advocate an Underweight positioning in Indian banks’ seniors," Nomura desk analyst Nicholas Yap says in a note. A $190 billion pile of stressed debt along with eroding capital buffers is constraining lenders ability to navigate the “challenging but competitive operating environment," Fitch said.

This story has been published from a wire agency feed without modifications to the text. Only the headline has been changed.

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