Fitch cuts IDBI Bank rating as NPAs climb to 21%

Fitch Ratings said it downgraded IDBI Bank’s Long-Term Default Rating and its ‘viability rating’ by one notch each to ‘BB+’ and ‘ccc’ with a stable outlook.

“IDBI Bank’s Viability Rating reflects the deterioration of its financial profile in the last two years and our expectation that both asset quality and capital will remain significant ongoing weaknesses,” the ratings agency said.

Non performing loans at IDBI bank increased by 80% in the financial year ending March 2017 to 21% of loans, triggering provisions and a loss equating to nearly 20% of its outstanding equity.

“The government injected around $300 million (1,900 cr) before year-end, but the injection was far outweighed by losses that were nearly three times higher.

“As a result, capitalisation was negatively affected, with the bank’s Fitch Core Capital falling by Fitch’s estimation to below 6%, from around 8% in FY16. The bank’s regulatory Tier 1 common equity ratio fell to around 5.6%, marginally above the 5.5% regulatory minimum,” the agency said.

Moreover, it said, things are unlikely to improve any time soon.

“We believe the risk of further losses and capital erosion is high, given the possibility of additional NPLs (non-performing loans) and that unreserved NPLs (or net NPL) stood at 112% of equity at FYE17.

“However, the government is likely to continue providing capital support to ensure the bank does not breach minimum regulatory capital ratios – in line with its own support stance. The deterioration in the bank’s position has led to the Reserve Bank of India invoking its “prompt corrective framework” in May 2017.”

On a positive note, Fitch said IDBI Bank’s funding profile remains a key relative strength, with current and savings accounts deposits and retail term deposits growing by more than 22% in FY17, when total deposits registered only 1% growth.

The surge was primarily due to demonetisation, but it reinforced the strength and stability of the bank’s funding franchise, which is primarily underpinned by its ownership.

IDBI Bank’s competitive position and ultimately its systemic importance have, and will continue to be, eroded as it deals with poor asset quality and a weak capital position, the agency added.

However, the bank’s large size, substantial deposit base and continued majority state ownership will likely keep the probability of government support commensurate with a Support Rating Floor of ‘BB+’, it added.