Fitch Ratings has revised Indian Bank's (IB) Outlook to Negative from Stable, while affirming its Long-Term Foreign Currency Issuer Default Rating (LT FCIDR) at 'BBB-'.
Fitch Ratings has revised Indian Bank's (IB) Outlook to Negative from Stable, while affirming its Long-Term Foreign Currency Issuer Default Rating (LT FCIDR) at 'BBB-'. Fitch has also affirmed IB's Viability Rating (VR) at 'bbb-', Short-term IDR at 'F3', Support Rating at '3', and Support Rating Floor at 'BB+'.
IB's National Long-Term rating has been affirmed at 'Fitch AA+(ind)' with a Stable Outlook and National Short-Term rating at 'Fitch A1+(ind)'. A full list of rating actions is provided at the end of this commentary.
The Outlook revision on the LT FCIDR reflects increasing asset quality pressures on IB compared with other Indian banks rated 'BBB-', on account of both cyclical and structural factors. However, the risk is somewhat mitigated by the bank's reasonable standalone financials including robust core capitalisation, falling-though-above average profitability, and stable funding and liquidity profile, which explains the Stable Outlook on the National Long-Term rating that is one notch below the highest level. The Support Rating and Support Rating Floor reflect IB's regional (65% branches in South India) as well as moderate albeit growing franchise (over 1,955 branches).
Gross non-performing loan (NPL) ratio increased to 2% in FY12 (financial year ended March 2012) from 1% in FY11. This is due to additional gross NPLs of up to INR19bn in FY12 (FY11: INR9.5bn), mainly in Q4FY12, on account of deterioration across sectors like real estate, energy, textiles, healthcare, infrastructure and retail. The deterioration reflects economic slowdown and IB's portfolio orientation towards small/mid corporates, small industries and retail loans. That being said, IB's strong collateral cover on several of these exposures increases prospects for recovery of these delinquent loans.
Around 3.7% of IB's total global advances (including all accounts) were restructured during FY12 (FY11: 1%), of which over one third was contributed by the infrastructure sector including weak state electricity boards. The proportion of restructured loans could rise further in FY13, due to any cyclical slowdown and more restructuring in the infrastructure sector. Overall, IB's total stressed portfolio (restructured and NPLs) could turn out to be higher than that of similarly rated Indian banks in the next 12 to 18 months, resulting in a downgrade of the LT FC IDR by one notch. Fitch notes that IB's restructured portfolio in 2009 was among the highest in the system, though the conversion into NPL from this portfolio was relatively modest at 10%. The bank's ability to contain the stressed asset portfolio in line with more diversified banks could result in the Outlook on the FC IDR being revised to Stable.
Capitalisation is among the strongest in the government banking spectrum, with Tier 1 ratio consistently over 11% (96% of which is core equity) for the past five years. The ratio could decline given the weak operating environment and falling profitability (return on average assets: 1.3% in FY12, 1.5% in FY11), but is likely to remain higher than most government banks'. In addition, the bank has headroom to raise equity as government shareholding is around 80% - well above the floor of 51%.
IB's funding profile is mainly driven by retail deposits (around 80% of total funding in FY12) and thus significantly mitigates refinancing risks. In addition, IB holds a repoable government security in excess of the statutory liquidity requirement, which partly offsets any gaps in its asset-liability maturity profile. Low-cost current and savings deposits contributed around 31% to total deposits in FY12 (FY11: 31%), which while healthy is not at par with the leading banks in the system.
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