ICRA has downgraded Oriental Bank of Commerce’s bonds due to worsening asset quality and sustained pressure on profitability.
The rating agency has revised ratings outstanding on the Rs 1,000-crore lower Tier-II bond programmes of the lender from AAA (stable) to AA+ (stable). It has also revised the ratings outstanding on the Rs 1,250-crore upper Tier-II and perpetual bond programmes from AA+ (stable) to AA (stable). “The rating revision factors in deterioration in asset quality indicators of the bank, increase in its net non-performing assets (NPAs) in relation to its net worth and sustained pressure on its profitability,” ICRA said.
The state-run lender has reported an increase in its gross NPA to 2.92 per cent as on end of December. The slippages mainly came from agriculture and small and medium enterprises and due to the shift to technology-driven system of NPA recognition. According to ICRA, OBC has high level of restructured advances, at 4.84 per cent and has relatively higher exposure to vulnerable sectors such as weak state electricity boards and distribution companies, and aviation.
“Some portion of these vulnerable exposures have been restructured or are in the process of being restructured with a moratorium of two to three years in most of the cases, which will ease pressure on gross NPAs over the short to medium term,” ICRA said. “However, vulnerability of those exposures continue to remain moderately high because of underlying weak financials of these entities and sectors.”
Profitability of the bank deteriorated on account of decline in net interest margins (NIMs) from 2.8 per cent in 2011 to 2.48 per cent for the first nine months of 2011-12, and a rise in provisions in relation to average total assets from 0.81 per cent in 2011 to 0.93 per cent in the April-December period.
Though the rating agency expects OBC’s net interest margins to benefit from the recent cut in cash reserve ratio, which would offset the rise in cost of funds to some extent, OBC’s relatively low-cost deposit basewill continue to put margins under pressure.