Domestic rating agency ICRA Ltd downgraded various debt instruments of IDBI Bank due to sustained weakness in the bank’s earnings over the last two years. The rating agency downgraded securities worth Rs 82,538 crore.
In addition to long term securities such as infrastructure bonds and additional tier-1 (AT-I) bonds, ICRA also downgraded IDBI Bank’s fixed deposit programme. The rating agency has also downgraded the short term rating on the bank’s Rs. 35,000 crore certificates of deposit programme, it said.
Apart from downgrading these instruments, ICRA has also put them on rating watch, with negative implications.
“The rating downgrade takes into account the bank’s substantially weak operating and financial performance during Q4FY2017 and in FY2017 overall, which has resulted in a significant erosion of its capital (CET-I),” ICRA said in a statement.
In February 2017, ICRA had highlighted the pressures being faced by the bank in meeting the minimum regulatory CET-I (including capital conservation buffer) level of 6.75 percent required as on 31 March, 2017 because of its weak capital position and the expectation of continued stress on profitability and asset quality.
Owing to the loss absorption features of the Basel III compliant Tier-I bonds, the rating agency has rated them four notches lower than Basel III compliant Tier-II bonds, at BBB-. This rating indicates moderate credit risk, according to the ICRA scale.
Profitability Drops On Weak Asset Quality
The state-owned lender witnessed slippages worth Rs 27,595 crore in the last financial year, as compared with Rs 19,087 crore in the year before that. Even though it managed to recover, upgrade and write off loans worth Rs 7,717 crore, it wasn’t enough to cover for the increased slippages.
“The slippages have been primarily driven by the bank’s high exposure to infrastructure sector and the AQR (asset quality review) exercise directed by the RBI in H2FY2016,” ICRA said.
The rating agency expects the asset quality pressures to persist through 2017-18, as a number of large assets under strategic debt restructuring (SDR), the scheme for sustainable structuring of stressed assets (S4A) and other restructuring schemes are yet to be fully recognized as NPAs.
ICRA expects the bank to require an equity infusion of Rs. 9,500-12,000 crore during 2018-19 which, at 70-85 percent of its current market capitalization, is large, the rating agency said. If the bank reports losses in 2018-19, the capital requirement will increase by a similar amount, ICRA said.
“The ratings for IDBI derive significant support from its Government of India (GoI) parentage and any change in the support provided by the GoI could warrant a rating change for the company,” the ICRA statement said.
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