TEXT-Fitch release on India's Corporation Bank

(The following statement was released by the ratings agency)

July 4 - Fitch Ratings has today downgraded India-based Corporation Bank's (CRBK.BO: Quote, Profile, Research) (CB) Individual rating to 'C/D' from 'C'. The agency has affirmed CB's Support rating at '4'.

CB in the past had the highest level of capitalisation among Indian banks and reported above average profitability. However, these parameters have gradually declined with growth in the loan portfolio and reduced margins. These factors, including the bank's limited income and portfolio diversity (compared to higher rated banks in India) are reflected in the downgrade. In FY08, the bank's loan portfolio grew at a significantly higher rate than the Indian banking system and the bank targets similar growth in FY09, particularly in the SME segment. In a less benign credit environment marked by rising interest rates, targeting aggressive growth could be challenging and may increase the risk profile of the bank.

At FYE08, CB was the eighteenth-largest bank in India by assets. While Reserve Bank of India has a good track record of supporting banks in distress, support in an extreme situation may be prioritized for larger and systemically more important banks, which is reflected in CB's support rating of '4'.

CB's capital adequacy ratio (CAR; FY08: 12.09%, FY07: 12.76%), an important indicator of financial strength, has been declining gradually since 2004 (FY04: 20%) and is now close to the system median. Nevertheless, Fitch expects the bank to be able to maintain CAR above its target of 12%, as the bank has a relatively high level of core capital (Tier 1 ratio was 9.63% in FY08; 11.3% in FY07), which provides the bank with ample headroom to raise Tier 2 capital to support growth and provide for operational risk charge under Basel II.

CB's FY08 ROA of 1.23% improved from FY07 (1.15%), mainly due to lower provisions for loan loss as well as the result of write-backs of provisions for depreciation in investments. Net interest margin (FY08: 2.74%; FY07: 3.25%) would likely decline further as the bank targets strong growth and it may be difficult to fully pass on the rising cost of deposits. The bank's fee income is stable and contributes 10% of operating income, driven primarily by cash management services, but remains considerably lower than the best banks in India. Delinquencies in the retail and SME sector have been rising for Indian banks, and while CB's loan portfolio has been well managed, its loan loss provisions may have to increase from the current low level (FY08 loan loss provision/average loans ratio: 0.35%; FY07: 0.68%).

Like most Indian banks, CB's gross (FY08: 1.47%; FY07: 2.05%) and net (FY08: 0.32%; FY07: 0.47%) NPL ratios have improved and compare well with the best banks in India. However, the ratios could increase in a less benign credit environment, as the result of a hike in lending rates (which typically has a lagged effect), as well as the impact of seasoning of its rapidly grown loan portfolio. Nevertheless, the bank's asset quality and net NPL/equity ratio compare well with the higher-rated banks in India. Also, its risk management systems are improving and its IT infrastructure is one of the best amongst government banks.

CB is 57%-owned by the government of India and another 27% is held by the Life Insurance Corporation of India (which is, in turn, wholly-owned by the government of India). The bank has a national presence with 981 branches and 957 ATMs. It traditionally catered to small businesses, and has recently increased its focus on the retail segment as well as large corporates.