Ratings agency Moody’s on Wednesday downgraded various debt instruments of Bank of India by a notch, owing to a sharp rise in non-performing assets and pressure on profitability.
The outstanding local currency deposit rating was downgraded from Baa2/P-2 to Baa3/P-3. This was driven by a revision in the bank’s financial strength rating (BFSR) from D+ to D, Moody’s said in a statement.
The revised rating for foreign currency senior unsecured debt is Baa3. Moody’s said the outlook on the debt and deposit ratings was affirmed at stable.
The revision factors in the sharp decline in the bank’s asset quality. Its profitability is increasingly coming under pressure. The bank would find it difficult to significantly improve its relatively weak asset quality over the next 12-18 months.
The operating environment in India is marked by an economic slowdown and high interest rates and inflation. These would continue to hit the repayment capacity of corporate borrowers and pose a risk of further deterioration in the bank’s asset quality.
Executive director N Seshadri said the bank had cleaned its asset portfolio in 2011-12. “Non-performing assets (NPAs) rose sharply this financial year, after the bank shifted to a system-based detection of NPAs. The peak NPA addition is behind us. Some sectors of the economy are stressed due to the slowdown. There has been an improvement in the recovery in the third and fourth quarters.”
Returns on risk-weighted assets decreased to 1.03 per cent on an annualised basis during the nine-month period ended December from 1.51 per cent in the year-ago period.
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The bank’s core Tier-I capital stood at seven per cent in March 2011. This is low, compared to that of its peers and is exacerbated by low internal capital generation — less than one per cent of risk-weighted assets.
On the bank’s strengths, Moody’s said the bank had comfortable liquidity and funding profiles. It is the fourth-largest public-sector bank in terms of total assets.
The rating outlook and BFSR would come under pressure in the next 12 months, if the bank continues to see the same pace of deterioration in asset quality, capitalisation and profitability as that seen in the nine-month period ended December.