 "'Allahabad Bank should opt for long-term infra bonds'")
Ratings agency India Ratings has said Allahabad Bank should raise money through long-term infrastructure bonds to ease refinancing pressure.
In a rating report, the agency said the Kolkata-based public sector lender's net interest margin benefits from moderate funding costs and lowcost deposits base compares favourably with peer banks. But its net interest margins (NIMs) could come under pressure due to refinancing risks.
While funding is retail-driven, the cumulative funding gap (up to one year) is high. The funding gap is measured as deposits and borrowings maturing in one year minus unencumbered cash and interbank assets. This amount is then divided by total assets to arrive at an estimate of gap in ratio terms. The one-year cumulative funding gap rose to 31.48 per cent in FY14 (March 2014) as against 26.42 per cent for FY13 (March 2013).
The bank should consider taking advantage of the recent Union Budget announcement and raise long-term infrastructure funds to ease refinancing pressures, India Ratings said.
Banks do not have to set aside money raised through these bonds to meet liquidity norms - statutory liquidity ratio and cash reserve ratio. Also, loans extended out of this money are exempted from calculating prior sector lending obligations.
Low-cost current and savings account or CASA deposits contributed 31.53 per cent to total domestic deposits in FY14. It compares favourably with mid-sized peer banks and helps in reducing funding costs. However, margins could come under pressure due to refinancing issues.
Referring to the asset quality of Allahabad Bank, the report said the gross non-performing assets grew to 5.73 per cent at the end of March 2014 from 3.92 per cent in FY13. The continuing stress in corporate, retail, agriculture and services portfolio pushed up the portfolio of bad loans.
Its exposure to stressed sectors - infrastructure, iron & steel, construction and textiles - accounted for around 42 per cent of its total portfolio. The expected cyclical uptick in the macroeconomy will ease some of the pressures from these sectors.
But, a significant part of the loan portfolio comprises of the infrastructure sector (17 per cent of advances) where the weak sector outlook will continue to impact asset quality.
The restructured assets' share in total assets declined to 7.75 per cent for FY14 from 10.1 per cent for FY13.
In a rating report, the agency said the Kolkata-based public sector lender's net interest margin benefits from moderate funding costs and lowcost deposits base compares favourably with peer banks. But its net interest margins (NIMs) could come under pressure due to refinancing risks.
While funding is retail-driven, the cumulative funding gap (up to one year) is high. The funding gap is measured as deposits and borrowings maturing in one year minus unencumbered cash and interbank assets. This amount is then divided by total assets to arrive at an estimate of gap in ratio terms. The one-year cumulative funding gap rose to 31.48 per cent in FY14 (March 2014) as against 26.42 per cent for FY13 (March 2013).
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Allahabad Bank might need to rely on volatile high-cost bulk deposits and certificates of deposit for refinancing, which puts pressure on NIM due to the funding mismatch. Its NIM stood at 2.74 per cent for FY14 as against 2.76 per cent for FY13.
The bank should consider taking advantage of the recent Union Budget announcement and raise long-term infrastructure funds to ease refinancing pressures, India Ratings said.
Banks do not have to set aside money raised through these bonds to meet liquidity norms - statutory liquidity ratio and cash reserve ratio. Also, loans extended out of this money are exempted from calculating prior sector lending obligations.
Low-cost current and savings account or CASA deposits contributed 31.53 per cent to total domestic deposits in FY14. It compares favourably with mid-sized peer banks and helps in reducing funding costs. However, margins could come under pressure due to refinancing issues.
Referring to the asset quality of Allahabad Bank, the report said the gross non-performing assets grew to 5.73 per cent at the end of March 2014 from 3.92 per cent in FY13. The continuing stress in corporate, retail, agriculture and services portfolio pushed up the portfolio of bad loans.
Its exposure to stressed sectors - infrastructure, iron & steel, construction and textiles - accounted for around 42 per cent of its total portfolio. The expected cyclical uptick in the macroeconomy will ease some of the pressures from these sectors.
But, a significant part of the loan portfolio comprises of the infrastructure sector (17 per cent of advances) where the weak sector outlook will continue to impact asset quality.
The restructured assets' share in total assets declined to 7.75 per cent for FY14 from 10.1 per cent for FY13.