CRISIL upgrades IOB's Basel III compliant tier II bonds from 'A+' to 'AA-'

Rating agency CRISIL has upgraded Indian Overseas Bank’s (IOB) Basel III compliant tier-II bonds from “A+” to “AA-” on strengthened capital position and steady improvement in the earnings profile.

In September 2021, the Reserve Bank of India had taken out the Chennai-based public sector lender from the Prompt Corrective Action (PCA) framework (PCA). IOB was placed under PCA in October 2015 on account of high Net-Performing Assets (NPAs) and negative Return on Assets (RoA).

CRISIL, in a statement, said the capital position has been supported by regular fund infusion and expectation of strong support from the majority stakeholder, the government. In March 2021, the government infused Rs 4,100 crore (Rs 8,217 crore in fiscal 2020, Rs 5,963 crore in fiscal 2019, and Rs 4,694 crore in fiscal 2018).

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Following the directive of the Reserve Bank of India (RBI) on fair valuation of zero coupon recapitalisation bonds impacted tier-1 and the total capital adequacy, which declined to 10.7 per cent and 13.8 per cent as on March 31, 2022. However, capitalisation metrics remained adequate with respect to regulatory requirements.

Excluding the impact of the fair valuation, tier-1 and CAR would stand at 12.6 per cent and 15.8 per cent, respectively, as on March 31, 2022.

With regular capital infusion from the government of India in the past has helped Chennai-based lender to build sufficient buffers for its non-performing assets (NPAs) with a provision coverage ratio (PCR) of 75% as on March 31, 2022. This, along with lower credit costs helped improve the earnings profile.

Asset quality, while still weak, has been improving with gross NPA at 9.8 per cent as on March 31, 2022, as compared to 11.7 per cent a year earlier. The restructured loans under the regulatory package for COVID19 stood at 4.1% of gross advances as on March 31, 2022.

CRISIL said going forward, the ability of the bank to manage collections and asset quality, given the current macroeconomic environment, will be a key monitorable.

Though the impact of the third wave of the Covid-19 pandemic was not material, any change in the payment discipline of the borrowers may affect delinquency levels and will remain a monitorable, it added.