Global rating agency Standard & Poor's today lowered credit rating of state-owned Indian Overseas Bank (IOB) to BB+, indicating speculative grade following deterioration in the lender's asset quality.
"We downgraded IOB following a recent deterioration in the bank's asset quality and our expectation that it will remain weak over the next 12 months," S&P said in a statement.
"We revised our assessment of the bank's risk position to weak from moderate, as our criteria define those terms. Accordingly, we lowered the bank's stand-alone credit profile(SACP) to 'BB' from BB+," it said.
The bank's exposure to high-risk sectors, such as iron and steel and textiles, is also greater than peers'. The bank's reported non-performing loan ratio rose sharply to 7.3 percent as of September 30, 2014, from 5 percent as of March 31, 2014, to become the highest among the Indian banks that are rated.
The share of gross standard restructured loans outstanding in IOB's loan book is also high at 7.85 per cent. The rating continues to reflect IOB's adequate business position, moderate capital and earnings, above average funding, and strong liquidity, it added.
The rating agency further said that very high likelihood that the government of India will provide timely and sufficient extraordinary support if the bank comes under financial distress. "We expect IOB's credit costs to remain high because of the bank's weak asset quality," it said, adding, it could be another two quarters before the pace of creation of stressed assets starts receding for the industry as a whole and the bank in particular.
IOB's aggressive growth over the past several years has stressed its internal control system, it said. Moreover, the bank's focus on the corporate segment brings in some concentration in that segment.
The rating agency, however, said that it could upgrade the bank if its risk management improves, and its asset quality improves sharply and is more in line with that of the industry.
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