S&P has placed its ratings on Indian Overseas Bank (IOB) on 'CreditWatch' with negative implication as it expects mounting losses to have strained the state-run lender's capital base.
The agency has put 'BB+' long-term and 'B' short-term issuer credit rating on IOB on "CreditWatch with negative implications".
"Our rating action reflects our expectation that IOB's mounting credit losses have strained its capitalisation and make it more onerous for the bank to meet the minimum regulatory capital requirement by March 2016," Standard & Poor's credit analyst Amit Pandey said.
S&P said IOB's aggressive growth over the past several years has stressed its internal control system.
The Reserve Bank's recent advice to banks to recognise select weak loans as nonperforming loans (NPLs) over the quarters ending December 2015 and March 2016, and shore up provisions for bad loans, has accentuated asset quality and capital problems for IOB, it said.
After reporting a loss for the fiscal year ended March 31, 2015, IOB reported a loss of Rs 1960 crore in the first nine months of fiscal 2016.
"IOB will have to raise further capital to meet the regulatory requirement... As the capital shortfall increases, IOB will find it more and more difficult to arrange requisite capital to meet the minimum regulatory capital," it said.
The agency further said that the bank may find it difficult to raise capital from capital markets, given its currently weak operating performance and will have to rely more on government support for capital infusions.
In another statement, S&P said it has affirmed its 'BB+' long-term foreign currency issuer credit rating on IDBI Bank with a stable outlook.
"The rating affirmation reflects our expectation that the likelihood of support to the bank from the government will remain very high," Pandey said.
The affirmed rating also reflects S&P view that the ratings have some cushion to absorb deterioration in the bank's credit profile."
The bank's NPLs rose sharply by 2 per cent in the December quarter to 8.9 per cent as of December 31, 2015, one of the highest increases in our rated portfolio.
"While we do not expect any material increase in the bank's stressed asset portfolio, we believe IDBI could continue to see migration from its standard restructured book into NPLs in the next few quarters," Pandey said.
The bank reported a loss of Rs 2,180 crore in the third quarter of fiscal 2016, which wiped off the first six months' profit. For nine-month ended December, loss stood at Rs 1,900 crore.
S&P expects IDBI to tap the market to raise capital or receive capital from the government to meet the minimum capital requirement.
