Basel III downgrade due to increase in NPA provisions: CARE

CARE Ratings has downgraded Indian Overseas Bank’s (IOB) rating of Basel III compliant bond issues to ‘CARE BBB’ from ‘CARE A-‘. The revision in rating is due to significant increase in provisions for non-performing assets (NPAs). The bank’s third quarter was largely impacted by the asset quality review (AQR), says P Sudhakar, AGM at CARE Ratings. The revision is subsequent to AQR by the Reserve Bank, he says. The new RBI guideline, which allows banks to treat certain assets on balance sheets, will help IOB meet its CET 1 norms, which otherwise would have been difficult, Sudhakar adds.Below is the verbatim transcript of P Sudhakar’s interview with Ekta Batra and Latha Venkatesh on CNBC-TV18.Ekta: Four out of past seven quarters have been losses for Indian Overseas Bank (IOB). How much do you think the pain could possibly increase with gross non-performing loans (NPLs) at 12.64 percent? A: Q3, the performance was affected significantly because of this asset quality review (AQR) and still the asset quality review some more accounts are pending. There could be further requirement for provisioning and recognition during Q4. So, by end of Q4 we would be in a better position to understand what is the full impact of this asset quality situation and the provisioning impact.Latha: What does it mean to the company, such a rating watch, their costs will go up? A: Whatever we have revised, it is only the perpetual bond; additional tier 1 (AT1) bonds. These instruments have slightly different characteristics compared to the tier 2 bonds. Latha: You are not looking to change the rating on the tier 2?A: Tier 2 there is no change in rating as of now. It continues to remain at A+.Latha: On the certificate of deposits (CDs)? A: We don’t have outstanding rating on their CDs.Ekta: Have you done the math regards to the CET1, on the common equity tier 1 for IOB post the Reserve Bank of India (RBI) changes or regulations that came in? A: We are taking a review of the situation. There are premeasured parameters. As you are aware, we are looking into the details, definitely this is going to help the bank to meet the capital adequacy norms. Mainly the common equity tier 1 because the revaluation reserve which was earlier under tier 2, now it will be under tier 1. So, this is going to help the bank to meet the CET1 norms which otherwise would have been slightly challenging. Latha: Now that this extra capital is also available, you still want to consider downgrading the perpetual bond ratings because the capital now looks a little sturdier, isn't it?A: As I pointed out earlier, this AT1 instrument has also got -- it is not only the capital adequacy level, it is also the profitability level also need to be looked into. So, only capital is not a criteria.