Rating agency Crisil has downgraded rating on Development Credit Bank’s (DCB’s) Rs 1,500-crore certificates of deposit (CDs) programme to ‘P1’ from ‘P1+’ due to deterioration in asset quality.
The gross non-performing assets of the small private sector bank rose to 4.7 per cent at the end of December 2008 from 1.5 per cent at the end of March 2008.
The asset quality of the bank has significantly weakened in the past three quarters. This deterioration was led by retail advances, especially unsecured advances, Crisil said.
The downgrade reflects the significant deterioration in DCB’s asset quality over the past three quarters, and expectation of continued pressure on the bank’s asset quality over the medium term.
The bank also suffered a loss of Rs 3.22 crore in the third quarter ended December 2008 as against the net profit of Rs 25.71 crore a year ago. It made a provision of 26.18 crore in the third quarter for deterioration in retail assets. The retail asset provisioning for nine months was Rs 64.29 crore from Rs 13.04 crore in April-December 2007.
Rating continues to factor in DCB’s currently adequate capitalisation and the support it is expected to receive from the Aga Khan Fund for Economic Development (AKFED). The capitalisation, as reflected in the Tier I capital adequacy, was at 12.9 per cent as on December 31, 2008.
The bank’s earning profile is expected to weaken due to consequent increase in provisioning and write-offs, on account of rising delinquencies. It may even report minimal profits or even losses for the next three to four quarters due to the combination of higher credit costs and lower operating income.
Deteriorating asset quality and subdued earnings profile are expected to exert pressure on the bank’s capitalisation levels as well.
Besides stress from unsecured loans, the secured retail portfolio has also been showing signs of weakening, reflected in the rise in the 30 plus days past due (dpd) levels across asset classes to 14.02 per cent as on December 31, 2008, from 4.8 per cent as on March 31, 2008.
The bank’s corporate advances portfolio may also witness some pressure on asset quality, given its vulnerability to the current slowdown in the economic environment.
