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Credit rating agency S&P Global Ratings has revised its outlook on public sector mortgage lender Indian Bank to stable from negative.

According to the rating agency, Indian Bank's capitalisation has strengthened owing to its recent equity capital raising and improving profitability.

The stable outlook reflects our expectation that Indian Bank's capitalization should be able to withstand modest asset quality pressures over the next 24 months.

S&P Global, at the same time affirmed its 'BBB-' long-term and 'A-3' short-term issuer credit ratings on the India-based bank.

The rating agency said the revision in the outlook is due to the raising of equity capital by Indian Bank through through qualified institutional investors, and its improving profitability.

"In our view, the stronger capital position should give the bank sufficient cushion against potential asset quality pressures from the brunt of a Covid-19 second wave; our baseline expectation is for Indian Bank's weak loans (gross nonperforming loans (NPLs) plus restructured loans) to stay below 12 per cent of total loans, and credit costs not materially worse than 2 per cent," S&P Global said.

The rating agency expects Indian Bank to further increase its capitalisation to protect the balance sheet against downside risks.

Indian Bank already has approval for raising equity capital of up to Rs 40 billion.

"We project the bank's weak loans to stay slightly above the industry level over the current fiscal year (fiscal 2022, ending March 31, 2022), mainly driven by our expectation of higher loan restructuring, and then trend downward over the next 12-24 months. This is in line with our expectation for the industry," S&P Global said.

According to S&P Global, the second wave of Covid-19 infections will bunch up the banking system's asset quality strain in the first half of fiscal 2022 amid weak collections and poor disbursements.

The sector's weak loans will likely remain elevated at 11-12 per cent of gross loans in the next 12-18 months. Credit losses for the sector should remain high at 2.2 per cent before recovering to 1.8 per cent in fiscal 2023.

S&P Global also expects Indian Bank's credit costs to remain elevated at about two per cent in fiscals 2022 and 2023, partly due to the management's policy of increasing its reserves to improve its net NPL ratio to about two per cent, from 3.5 per cent at the end of June 2021.

The bank's reported NPLs have continued to sequentially trend downward to about 9.7 per cent as of June 2021, from the high of 11.4 per cent, following the amalgamation of Allahabad Bank.

The agency projects Indian Bank's weak loans to peak at about 12 per cent of total loans in fiscal 2022 and trend downward to about 11.5 per cent in fiscal 2023.