| IDBI Bank’s foreign currency rating February 14 2010 |
Capital Intelligence (CI), the international credit rating agency, today announced that it has affirmed
IDBI Bank’s foreign currency long-term and short-term ratings at BBB- and A3, respectively, with a
support rating of 2. Given the Bank’s large size, its strategically important development banking function
(as mandated by the government of India) and majority state ownership, Capital Intelligence believes that
official support would be very likely in case of need.
IDBI Bank’s financial strength rating is affirmed at BB. The principal factor constraining the rating is the
Bank’s high level of restructured loans and weak profitability, which is attributed to a high funding cost and
relatively low fee and commission earnings. A Stable outlook is assigned to all the ratings in view of the
substantial increase in operating profitability in the current financial year and the improving outlook for the
corporate sector in the recovering domestic economy.
IDBI Bank’s organisational restructuring is complete, but the slowdown in the domestic economy, together
with the global financial crisis, has hampered the Bank’s turnaround. The Bank is still in the process of
making structural changes to its balance sheet to improve its earnings power. These include expanding
customer funds as a proportion of total liabilities and capital, significantly growing the low-cost retail
deposit base and increasing higher yielding retail and SME exposures in the credit portfolio. These
changes are essential to strengthen the Bank’s net interest margin, which remains much lower than that of
its peers. Some improvement in the net interest spread and a substantial increase in fee and commission
income were observed in IDBI Bank’s year-to-date Q3 FY2010 results. However, high loan-loss provision
charges continued to strain profitability. The Bank’s return on average assets may remain low for a few
more quarters due to tighter central bank provisioning norms introduced in FY2010.
While the Bank continues to maintain a low non-performing loans (NPLs) to gross loans ratio, its
provisions to NPLs ratio at present is much lower than the industry average. Asset quality ratios
deteriorated slightly in the first nine months of FY2010 reflecting the effects of the slowdown in the
domestic and global economies. Restructured loans have increased substantially, particularly in the
current financial year, partly due to temporary relaxations in restructuring norms introduced by the central
bank. NPLs could rise if restructured loans fail to perform adequately.
IDBI Bank’s capital adequacy ratio meets regulatory norms, but is below the minimum level informally
stipulated by the government for the banks that it owns. The Bank is therefore likely to receive additional
capital from the Indian government over the next few quarters.
IDBI Bank was established as a development finance institution in 1964. In 2004 the Bank merged with
its profitable five-year old commercial banking subsidiary, which was run as a private sector bank, and
subsequently converted itself into a fully fledged commercial bank. The government currently holds
52.7% of the Bank’s equity. The remaining shares are widely held. IDBI Bank is the eighth largest
bank in India with total assets of USD34 billion at end March 2009. It has a little over 3% share of total
assets in the banking sector. The Bank provides a wide range of products and services to individuals
and companies. Infrastructure finance and project lending continue to be major activities for the Bank,
but short-term working capital loans are rising. The Bank’s network of 702 branches and extension
counters and 1,165 ATMs at end December 2009 is small compared to many public sector banks in the
country. |
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