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Rating agency CRISIL has downgraded the rating on Indian Overseas Bank’s (IOB’s) Lower Tier-II Bonds, from AA+ to AA, due to an expected weakening in credit profile due to persistent pressure on asset quality and the earnings profile.
The ratings continue to factor in the strong support IOB is likely to receive from the central government of India and its adequate capitalisation.
IOB’s asset quality has deteriorated sharply over the past year, to less than the sector average. Gross non-performing assets (NPAs) rose to 4.5 per cent of the total in June from 2.7 per cent as on March 31, 2012. Gross NPAs were four per cent at the end of March 2013.
Further, the bank had a large proportion of restructured standard assets, of 10.5 per cent as on end-June.
CRISIL said it believed the asset quality would remain weak over the medium term, given the challenging macroeconomic environment. This will result in an elevated level of slippages in the loan portfolio, especially from exposures to mid-size companies and small & medium enterprises.
The Chennai-based public sector lender also has a weak earnings profile, marked by low net interest margins and high provisioning costs. The return on assets ratio remains significantly lower than its peers, at around 0.2 per cent (on an annualised basis as of this June).
CRISIL believes that the bank’s profitability will continue to be adversely impacted due to increase in provisioning costs because of the increased asset quality challenges.
Additionally, the bank’s net interest margins are likely to remain under pressure over the next few quarters because of continued high borrowing costs.
