Moody’s Investors Service has affirmed all Syndicate Bank’s local currency deposit ratings and all debt ratings, but has revised the outlook on these to negative from stable. The affected ratings are its Baa2/P-2 local currency deposits, Baa2 foreign currency senior unsecured debt, (P)Baa2 foreign currency senior unsecured debt programme, (P)Baa3 foreign currency subordinated debt programme and (P)Ba1 foreign currency junior subordinated debt programme, according to a Moody’s statement.
The outlook on the foreign currency deposit rating of Baa3/P-3 is stable, as this has been constrained by the sovereign ceiling for foreign currency deposits and is already below the unconstrained foreign currency senior unsecured debt rating. The change reflects a negative outlook being assigned to the bank’s financial strength rating, of D+, mapping to a baseline credit assessment (BCA) of Ba1.
“The revision in the rating outlook factors in the increasingly challenging operating environment for Indian banks. As Syndicate Bank has a weaker franchise than other Indian banks rated Baa2 by Moody’s, its rating is more vulnerable to potential deterioration in financial strength in the current environment. We believe the bank’s franchise is weaker than other Indian banks rated Baa2 and is unlikely to significantly change over the next few quarters”, said Vineet Gupta, a vice-president and senior analyst at Moody’s.
Asset quality indicators are deteriorating. The gross NPL (non-performing loan) ratio reached 2.38 per cent at end-September 2011 (2.24 per cent at end-September 2010). Over the next few quarters, given the trend in increasing levels of gross NPLs and net NPLs and expected stress in the restructured loan portfolio, Moody’s believes the bank could report a gross NPL ratio in excess of 2.5 per cent and net NPLs to net advances of over 1.25 per cent.
“Given the local economic slowdown, which is expected to impact the financial position and repayment capacity of borrowers, asset quality indicators could further deteriorate,” Gupta said.
During the six-month period ending September 2011, net interest margins declined to 3.26 per cent (3.32 per cent as of end-September 2010), driven by an increase in cost of funds. Over the next few quarters, Moody’s expects the cost of funds to continue rising, as maturing deposits are re-priced at a higher interest rate, increasing the pressure on net interest margins.
“Apart from pressures on net interest margins, Syndicate Bank compares unfavourably to other Baa2-rated Indian banks in terms of its low fee income share -- at eight per cent of total income -- due to its franchise as a mid-sized public sector bank,” Gupta added.
The ratings could be downgraded if net NPLs increase to over 1.25 per cent of net loans, and/or if there is a decline in the return on average risk-weighted assets below 0.75 per cent. If Syndicate fails to maintain a core Tier-I capital ratio of eight per cent or above, its ratings would also see downward pressure. Any decline in the bank’s franchise -- as seen by a decline in the market share of deposits or loans to less than two per cent -- and a further increase in the proportion of bulk purchased deposits in its total funding mix would likely trigger a rating revision.
An upgrade is unlikely during the next one to two years.
