(The following statement was released by the rating agency)
Aug 17 - Fitch Ratings has affirmed the National Long-Term ratings of three Kerala-Based private sector banks. Federal Bank Limited (FBL) has been affirmed at ‘Fitch AA-(ind)', South Indian Bank (SIB) at ‘Fitch A+(ind)', and Dhanlaxmi Bank (Dhanlaxmi) at ‘Fitch BBB-(ind)'. The Outlooks on the National Long-Term ratings of FBL and SIB are Stable. Dhanlaxmi’s ratings remain on Rating Watch Negative (RWN). A full list of rating actions is provided at the end of this commentary.
The relative rating level of these three banks reflects the strength of their regional franchise, performance track record, profitability, and capital buffers. In particular, FBL and SIB are, in Fitch’s view, better positioned to absorb the pressures of a more challenging environment given their stronger profitability and capitalisation as well as levels of risk diversification. The prudence of each of the banks recent growth strategy (some more rapid than others) will be tested in the current economic down turn. In particular, all three banks have focused on growing their gold loan books. In Fitch’s view, the zero-risk weighting for these loans, with loan-to-value (LTV) below 75%, has inflated regulatory capital ratios. Rapid growth has led to rising balance sheet leverage and lower asset/equity ratios.
Dhanlaxmi’s RWN has been maintained due to the more immediate uncertainty created by the resignation of its auditors. The RWN would be resolved on the appointment and publication of accounts signed off by new auditors. A material restatement in accounts would trigger a rating downgrade to at least the ‘BB’ range. Fitch expects the rating Outlook to be Negative after the RWN is resolved considering the challenges regarding operating performance and on-going restructuring of its operations. Ongoing operational losses, while reducing, will weigh on already low core capital ratios. Fresh common equity and the stabilisation of its operating performance would reduce downward pressure on the ratings.
FBL’s ratings are underpinned by its healthy capitalisation (FY12: Tier I ratio: 15.86%; Fitch Core Capital: 16.14%), robust and consistently above-system-average profitability (return on assets (ROA): 1.37% in FY12), sound customer funding profile, and its reducing reliance on bulk deposits. FBL’s ratings are constrained by its weak asset quality (gross non-performing loans (NPL) ratio: 3.35% in FY12), though the high 81% loan loss reserve cover provides comfort, and its limited income diversification. The reduced reliance on bulk funding has supported its high PPOP, providing a strong cushion to withstand stress in its asset portfolio.
SIB’s ratings are supported by its sound asset quality (gross NPL: FY12: 0.97%), satisfactory capital position (Fitch Core Capital: 12.46% in FY12), and its modest profitability (ROA: 1.1% in FY12). However, the strong growth in its asset base, not equally supported by a similar growth in its low-cost customer funding, has increased reliance on bulk deposits. Increasing concentration to gold loans (25% of loan book) and higher exposures to weak sectors like infrastructure, textiles, commercial real estate weigh down its credit profile. Against the backdrop of modest profitability, low equity cushion (asset/equity: 18.5x) adds vulnerability to its credit profile.
There is currently limited potential for an upgrade of FBL and SIB’s ratings. Any material deterioration in asset quality, loss absorption capacity, and funding mix would increase pressure on their ratings.
The rating actions are as follows:
National Long-Term Rating affirmed at ‘Fitch AA-(ind)'; Outlook Stable
INR4.5bn subordinated debt affirmed at ‘Fitch AA-(ind)’
National Long-Term Rating affirmed at ‘Fitch A+(ind)'; Outlook Stable
INR2.65bn subordinated debt affirmed at ‘Fitch A+(ind)’
National Long-Term Rating affirmed at ‘Fitch BBB-(ind)'; RWN
INR170m subordinated debt affirmed at ‘Fitch BBB-(ind)'; RWN