(Repeat for additional subscribers)
June 3 (The following statement was released by the rating agency)
This announcement corrects the version published earlier today, in which Indian Bank's
Support Rating (SR) and Support Rating Floor (SRF) were incorrect.
Fitch Ratings, Singapore, 03 June 2013: Fitch Ratings has today affirmed the
Long-Term Issuer Default Rating (IDR) of IDBI Bank Ltd. (IDBI) and Indian Bank
(IB) at 'BBB-'. Simultaneously, Fitch has also affirmed IDBI's Viability Rating
(VR) at 'bb' and that of IB at 'bbb-'. IDBI's SR and SRF have also been affirmed
at '2' and 'BBB-' respectively, while those of IB have been affirmed at '3' and
'BB+' respectively. The Outlook on the IDRs is Negative. A full list of rating
actions is at the end of this commentary.
KEY RATING DRIVERS
IDBI's SR and SRF are driving factors behind its IDR and primarily reflect
Fitch's expectation of a continued high probability of government support to the
bank. It factors in IDBI's size and systemic importance given its share in
system assets and deposits (both at around 3.5% in FY12) and history of support
extended during its transition from a legacy development finance institution
(DFI). Regular capital injections from the government, which totalled around
INR65bn (including INR3.8bn from Life Insurance Corporation of India in FY11)
were also made in the last three years, as was the conversion of its Tier 1
bonds into common equity in FY12. The negative outlook on IDBI's IDR mirrors
that of the sovereign.
IDBI's VR suffers from an overhang of its legacy as a DFI, which reflects in its
wholesale focused business model and also performance. While Fitch acknowledges
steady improvements achieved by IDBI in the last three years, it still lags
behind large and some mid-sized government banks. Despite a total capitalisation
of 13.1% (at FY13), Tier 1 at 7.7% is comparably lower than most peers. IDBI's
low-cost deposit ratio per branch has held up well and there has been a
significant reduction in its dependence on expensive bulk deposits (36% of total
deposits FY13; 52% FY12). While it is still above the government's maximum
prescribed ceiling of 15%, sustained lower dependence should benefit funding
costs and eventually profitability in the medium term. In the interim, asset
quality will remain a challenge to its profitability which has traditionally
been lower (ROAA five-year average: 0.6%) owing to its wholesale focus.
In FY13, IDBI reported gross NPL ratios of 3.2% (FY12: 2.5%) though on a
stressed assets basis (gross NPL plus restructured loans-to-total loans) the
ratio was 10.8%. IDBI's exposure to infrastructure is partly due to its DFI
legacy but stress on the sector (as a whole) is on the rise as observed through
intense restructuring in the sector (particularly in power) in FY13. Fitch
expects the same to maintain momentum through FY14 as structural bottlenecks
push under-construction projects beyond their start dates. While IDBI has had
limited success in paring down exposure, it has managed to keep it broadly
stable. IDBI's non-funded book is on the higher side among government banks and
while it may be a good source of fee income, the risk under this book is still
largely untested. This remains a matter of concern since IDBI's ability to
withstand moderate level of stress in the infrastructure sector is still lower
than peers rated higher on the VR.
IB's SR and SRF are more representative of its moderate size and systemic
importance despite a larger branch presence than IDBI. IB accounts for around 2%
of system assets and deposits, which are concentrated in southern India. This is
likely to result in a moderate probability of support from the government, if
needed. IB's IDR - which is at the same level as that of IDBI - is driven by its
VR. Accordingly, the negative outlook on IB's IDR is also a reflection of the
potential for further weakening of its intrinsic credit profile; IB's IDR was
revised to Negative ahead of the negative outlook on the sovereign.
IB's VR has come under pressure owing to asset quality issues exacerbated by
high concentrations in the infrastructure sector. Consequently, the potential
impact on IB's stressed asset ratio (FY13: 11.3%) has been more pronounced
despite IB managing to pare down exposure to infrastructure compared with FY10.
The reported gross NPL ratio at 3.3% (FY12: 2%) has been relatively more benign
and could potentially face some pressure, albeit at a moderating pace. While
both IB and IDBI have been making efforts to reduce or stem their exposures,
concentration risk will take time to address. IB's ability to withstand a
moderate amount of stress is better than most of its peers owing to better
capital position and superior profitability. However, a severe and prolonged
downturn in the infrastructure sector - which is not Fitch's base case - may
prove even difficult for IB to handle and could affect its credit profile.
IB's relatively solid and consistent capital position is the key underpinning
its VR and is supported by a better-than-peers, albeit declining, profitability
cover and an improving funding profile. While IB's total capitalisation is
comparable to that of IDBI (13.1% at FY13), the quantity and quality of capital
have been consistently superior with a Tier 1 ratio of around 11%. IB, thus far,
has managed its capital position mainly through internal accruals supported by
better profitability and stable dividends. While loan impairment charges have
increased significantly for both IB and IDBI, the former's ROAA of 1.04 %
(FY13) is still higher than most large and mid-sized government banks in India,
albeit off its previous highs (five-year average: 1.4%).
RATING SENSITIVITIES - IDRs and VRs
IDBI's IDR is at the same level as its SRF, and will not be affected by a
downgrade of its VR, unless considerations underpinning the 'BBB-' SRF also
weaken. However, a downgrade of India's sovereign rating - which is currently on
Negative Outlook - will also trigger a downgrade of the IDR for IDBI. Similarly,
a change in the sovereign's outlook to stable will also lead to a revision of
the outlook on IDBI's IDR.
In comparison, IDBI's VR at 'bb' is representative of its relative weaknesses
which partly stem from its legacy as a DFI. While there have been steady, but
slow, improvements in performance in the last few years, it is well behind that
of better rated VR peers. The VR could, however, be downgraded if its
stand-alone strength is materially affected by a sustained disruption or
reversal of these improvements amid growing concentration risk, greater than
expected weakening in asset quality and/or deteriorating funding mix, but this
scenario is viewed unlikely.
IB's IDR and VR - which are at the same level as the sovereign - have no
immediate upside. However, the IDR (and the VR) will be downgraded in the event
of a sovereign downgrade or if the VR gets downgraded ahead of any sovereign
downgrade. The IDR is expected to maintain its negative outlook even if the
sovereign's outlook were to be revised to stable given pressures on its
standalone credit profile. IB's VR, which is rated two notches above IDBI, is
experiencing downward pressures and will likely be downgraded if capitalisation
deteriorates more than expected. The VR also remains vulnerable to prolonged
stress in the infrastructure sector which may weaken the bank's loss-absorption
capacity and lead to a downgrade of the VR.
RATING SENSITIVITIES - SRs and SRFs
The SRs and SRFs are determined by the agency's assessment of the government's
propensity and ability to support a bank determined by its relative size and
systemic importance. A change in the government's ability to provide
extraordinary support due to a change in the sovereign ratings would affect the
SRs and SRFs. The SRs and SRFs will also be impacted by any change in the
government's willingness to extend timely support.
The rating actions are as follows:
IDBI Bank Ltd.
Long-Term IDR affirmed at 'BBB-'; Outlook Negative
Short-Term IDR affirmed at 'F3'
Viability Rating affirmed at 'bb'
Support Rating affirmed at '2'
Support Rating Floor affirmed at 'BBB-'
Long-Term IDR affirmed at 'BBB-'; Outlook Negative
Short-Term IDR affirmed at 'F3'
Viability Rating affirmed at 'bbb-'
Support Rating affirmed at '3'
Support Rating Floor affirmed at 'BB+'