Fitch Ratings has revised the outlook for the Chennai-based Indian Bank to negative from stable, on increasing pressure on its asset quality due to cyclical and structural factors.
However, the ratings agency affirmed the long-term foreign currency issuer default rating at BBB-. The bank’s viability rating at BBB, short-term IDR at F3, support rating at 3 and support rating floor at BB+ remained unchanged. National long-term rating has been affirmed at AA+, with a stable outlook.
The rating revision reflects increasing asset quality pressures on the public sector lender, compared with other Indian banks rated BBB-, on account of both cyclical and structural factors, Fitch said.
However, the risk is somewhat mitigated by reasonable stand-alone financials, including robust core capitalisation, above-average profitability, stable funding and liquidity profile. This explains the bank’s stable outlook on the national long-term rating, one notch below the highest level.
The support rating floor reflects the bank’s regional (65 per cent of branches in South India) and moderate, albeit growing, franchise (1,955 branches).
Its gross non-performing assets (NPA) ratio increased to two per cent in 2011-12 from one per cent the year before.
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This is due to additional gross non-performing loans of up to Rs 1,900 crore in 2011-12 against Rs 950 crore the year before.
The substantial rise in gross NPA happened in the January-March quarter due to deterioration across sectors such as real estate, energy, textiles, healthcare, infrastructure and retail. It shows Indian Bank’s portfolio orientation towards small and mid-sized companies and retail loans.
However, the bank’s strong collateral cover on several of these exposures increases prospects for recovery of these delinquent loans.
Around 3.7 per cent of Indian Bank’s global advances (including all accounts) were restructured last financial year against one per cent in 2010-11. Of this, a third was contributed by the infrastructure sector, including weak state electricity boards.
The proportion of restructured loans could rise further in the current financial year due to any cyclical slowdown and more restructuring in the infrastructure sector.