May 29, 2017 / 7:55 AM / 3 months ago

Fitch Downgrades IDBI Bank's IDR to 'BB+'; Outlook Stable

(The following statement was released by the rating agency) SINGAPORE/MUMBAI, May 29 (Fitch) Fitch Ratings has downgraded IDBI Bank Ltd.'s Long-Term Issuer Default Rating (IDR) to 'BB+', from 'BBB-', and its Viability Rating to 'ccc', from 'bb-'. The Outlook on the IDR is Stable. A full list of rating actions is at the end of this commentary. IDBI Bank's IDR and senior debt ratings have been downgraded due to a downward revision in its Support Rating to '3', from '2', and a revision in its Support Rating Floor to 'BB+', from 'BBB-'. IDBI Bank's Support Rating Floor is rated higher than its Viability Rating and remains the primary driver for its IDR. This follows a reassessment of Fitch's support assumptions, given the bank's ongoing challenges, which are leading to an erosion of its systemic importance, particularly as shareholder capital support has been kept to a minimum. However, we expect the bank's majority government ownership to remain in place and that authorities are willing to provide support. The Viability Rating has been downgraded due to a sharper-than-Fitch-expected deterioration in IDBI Bank's financial profile, as reflected in its much lower core capitalisation following two consecutive years of rising non-performing loans (NPL) and heavy losses. Fitch expects these pressures to remain over the medium term. KEY RATING DRIVERS IDRS, SUPPORT RATINGS AND SUPPORT RATING FLOORS IDBI Bank's Long-Term IDR is at the same level as its Support Rating Floor. The ratings are driven by its Support Rating, which reflects Fitch's expectation of a moderate probability of extraordinary state support due to its waning market position and systemic importance. 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. 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+'. The Stable Outlook mirrors the Outlook on India's rating (BBB-/Stable), reflecting our view of no significant change in the sovereign's ability to support banks during extraordinary stress. VIABILITY RATING 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. NPLs increased by 80% in the financial year ending March 2017 (FY17) (FY16: +96%), to 21% of loans triggering provisions and a loss equating to nearly 20% of its outstanding equity. The government injected around USD300 million 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. We believe the risk of further losses and capital erosion is high, given the possibility of additional NPLs 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. 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. SENIOR DEBT IDBI Bank's senior debt rating is at the same level as its IDR, as the debt represents its unsecured and unsubordinated obligation. RATING SENSITIVITIES IDRS, SUPPORT RATING, SUPPORT RATING FLOOR AND SENIOR DEBT The Support Ratings and Support Rating Floors are determined by the agency's assessment of the government's propensity and ability to support the bank, based on its size and systemic importance. A change in the government's ability to provide extraordinary support due to a change in sovereign ratings or a change in the government's propensity to extend timely support may affect the Support Rating and Support Rating Floor. The IDR is driven by IDBI Bank's Support Rating Floor and may be downgraded if factors underpinning the Support Rating Floor weaken. IDBI Bank's IDR is one notch lower than the sovereign rating, which implies that a downgrade in India's sovereign rating may result in a downgrade of the bank's IDR. Likewise, a change in the sovereign Outlook may lead to a revision of the Outlook on the bank's IDR. Any changes in the banks' IDRs would result in equivalent changes in its senior debt ratings. VIABILITY RATING The Viability Rating is sensitive to the bank's ability to address its capital position. In particular, if the bank is unable to raise a significant portion of its capital needs, independent of the government, for example via an equity stake sale, balance sheet cuts or asset sales, Fitch is likely to downgrade the Viability Rating to 'f'. A large capital injection by the government to recapitalise the bank to address a material shortfall in minimum capital ratios will be seen as extraordinary support and the agency will view the bank as having failed. The rating actions are as follows: IDBI Bank: - Long-Term IDR downgraded to 'BB+' from 'BBB-'; Outlook Stable - Short-Term IDR downgraded to 'B' from 'F3' - Viability Rating downgraded to 'ccc' from 'bb-' - Support Rating downgraded to '3' from '2' - Support Rating Floor revised to 'BB+' from 'BBB-' - USD5 billion medium-term note programme downgraded to 'BB+' from 'BBB-' - USD2 billion senior unsecured notes downgraded to 'BB+' from 'BBB-' Contact: Primary Analyst Ambreesh Srivastava Senior Director +65 6796 7218 Fitch Ratings Singapore Pte Ltd. One Raffles Quay South Tower #22-11 Singapore 048583 Secondary Analysts Saswata Guha Director +91 22 4000 1741 Committee Chairperson Tim Roche Senior Director +61 2 8256 0310 Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: bindu.menon@fitchratings.com; Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. 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