Moody's upgrades outlook on IDBI Bank to 'positive' from 'stable'

Expects improvement in capital position and stable asset quality

Global rating agency Moody's has upgraded the outlook on public sector lender IDBI Bank to 'positive' from 'stable' on expectation of improvement in capital position and stablilisation of asset quality.

Ratings also affirmed the long-term local and foreign currency bank deposit rating of IDBI Bank Ltd (IDBI) at B1. It also affirmed the bank's baseline credit assessment (BCA) at caa1 and the counterparty risk assessment (CRA) at Ba3 and revised the outlook on IDBI's DIFC branch (Dubai branch) to positive from stable.

The positive outlook reflects the upward pressure that could develop on the bank's long-term rating. This could happen if credit fundamentals -- namely the capital position -- continues to improve over the next 12-18 months due to capital infusions from the Indian government (Baa2 stable).

The positive outlook also factors in Moody's view on the expected evolution of IDBI's balance sheet, including a stabilization in asset quality and continued stable funding and liquidity positions, Moody’s said a in statement.

According to the recapitalization plan announced in October 2017, the government has committed to infuse Rs 1.53 trillion into the public-sector banks by March 2019, of which Rs 800 billion will be injected in the form of recapitalization bonds. IDBI will receive Rs 78.81 billion in new capital by March 2018.

Moody's estimates that this capital infusion will increase the common equity tier 1 (CET1) ratio for IDBI to about 9.8% based on the risk weighted assets as of 31 December 2017. At the same time, the bank will continue to report losses over the next few quarters on account of high provisioning charges, eroding this capital level.

Moody's expects that the CET1 ratio as of 31 March 2019 will meet the minimum Basel III capital requirements.

As of the latest quarter ended 31 December 2017, IDBI's gross NPA ratio

declined to 24.7 per cent from the high of 25 per cent in the quarter ended September 2017. In addition, the net NPA ratio stabilized at 14.3 per cent compared again with the previous quarter.

The bank has also been able to maintain a stable funding base in spite of its weak solvency profile. It reported a current and savings account (CASA) balance of Rs 856 billion as of 31 December 2017, which was a moderate increase from Rs 846 billion the year before.

With the bank shedding some of its expensive bulk deposits in the past year, the CASA ratio improved significantly to 36.1 per cent of deposits at end December 2017 compared to 28.4 per cent reported in December 2016. This improvement in the bank's funding mix is also a positive driver for the bank's profitability, it added.