Domestic rating agency Icra on Tuesday said it has downgraded various debt instruments of state-run IDBI Bank on the back of weak profitability and deteriorating asset quality, which have resulted in erosion of its capital.
The agency has also kept the lender's ratings under watch with negative implications.
"The rating downgrade takes into account the bank's substantially weak operating and financial performance during fourth quarter of financial year 2017 and in the financial year 2017 overall, which has resulted in a significant erosion of its capital (CET-I)," Icra said in a note.
As the losses during FY17 far exceeded the capital infusion by the government, the CET-I was lower at 5.64 per cent as on March 31, 2017 as compared to 7.98 per cent as on March 31, 2016.
In February 2017, agency had highlighted the pressures being faced by the bank in meeting the minimum regulatory CET-I level of 6.75 per cent required as on March 31, 2017 because of weak capital position and the expectation of continued stress on profitability and asset quality.
Despite a capital infusion of Rs 1,900 crore in March 2017 by the government, the sharp deterioration in asset quality and consequent increase in credit costs resulted in the bank's CET-I being lower than the required regulatory level as on March 31, 2017.
The rating outfit said the bank is thus likely to be strained to meet the increasing capital requirements under Basel III.
Taking into account the capital levels as on March 31, 2017, a buffer of 0.5 per cent over the regulatory minimum levels and a 5-10 per cent growth in risk weighted assets, Icra expects the bank to require an equity infusion of Rs 9,500-12,000 crore during fiscal 2018-2019 which, at 70-85 per cent of its current market capitalisation, is large.
"If the bank reports losses during fiscal 2018-2019, the capital requirement will increase by a similar amount. Given the bank's immediate and large quantum of capital requirement, we have placed its ratings on watch with negative implications," the note said.
The rating agency said high levels of losses has also significantly eroded the bank's distributable reserves, which the bank can use to service the coupon on its additional tier-I (AT-I) bonds.
The bank's gross NPAs almost doubled to 21.25 per cent of the gross advances in the fourth quarter of the last financial year compared to 10.98 per cent in the corresponding period of the previous financial year. The net NPAs were 13.21 per cent against 6.78 per cent.
The rating agency said even though the bank reported a sharp increase in its NPA levels over the past three years, the asset quality pressures are likely to remain high during the current financial year.
With low provision cover and high net NPAs and an expectation of further weakening in asset quality, the bank's internal capital generation will remain week over the medium term, it added.
The agency has also kept the lender's ratings under watch with negative implications.
"The rating downgrade takes into account the bank's substantially weak operating and financial performance during fourth quarter of financial year 2017 and in the financial year 2017 overall, which has resulted in a significant erosion of its capital (CET-I)," Icra said in a note.
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In the year ended March 31, 2017, the bank posted a net loss of Rs 5,158 crore as against a net loss Rs 3,665 crore in financial year 2016.
As the losses during FY17 far exceeded the capital infusion by the government, the CET-I was lower at 5.64 per cent as on March 31, 2017 as compared to 7.98 per cent as on March 31, 2016.
In February 2017, agency had highlighted the pressures being faced by the bank in meeting the minimum regulatory CET-I level of 6.75 per cent required as on March 31, 2017 because of weak capital position and the expectation of continued stress on profitability and asset quality.
Despite a capital infusion of Rs 1,900 crore in March 2017 by the government, the sharp deterioration in asset quality and consequent increase in credit costs resulted in the bank's CET-I being lower than the required regulatory level as on March 31, 2017.
The rating outfit said the bank is thus likely to be strained to meet the increasing capital requirements under Basel III.
Taking into account the capital levels as on March 31, 2017, a buffer of 0.5 per cent over the regulatory minimum levels and a 5-10 per cent growth in risk weighted assets, Icra expects the bank to require an equity infusion of Rs 9,500-12,000 crore during fiscal 2018-2019 which, at 70-85 per cent of its current market capitalisation, is large.
"If the bank reports losses during fiscal 2018-2019, the capital requirement will increase by a similar amount. Given the bank's immediate and large quantum of capital requirement, we have placed its ratings on watch with negative implications," the note said.
The rating agency said high levels of losses has also significantly eroded the bank's distributable reserves, which the bank can use to service the coupon on its additional tier-I (AT-I) bonds.
The bank's gross NPAs almost doubled to 21.25 per cent of the gross advances in the fourth quarter of the last financial year compared to 10.98 per cent in the corresponding period of the previous financial year. The net NPAs were 13.21 per cent against 6.78 per cent.
The rating agency said even though the bank reported a sharp increase in its NPA levels over the past three years, the asset quality pressures are likely to remain high during the current financial year.
With low provision cover and high net NPAs and an expectation of further weakening in asset quality, the bank's internal capital generation will remain week over the medium term, it added.