Fitch affirms Indian Bank's ratings with long term stable outlook
January 29, 2009: Fitch Ratings has affirmed the ratings of Indian Bank (IB) as follows:
National Long-term Rating at 'AA(ind)'
National Rating of INR3.0bn subordinated lower tier 2 debt at 'AA(ind)'
National Short-term Rating at 'F1+(ind)'
INR40bn certificates of deposit programme at 'F1+(ind)'
Individual Rating at 'C/D'
Support Rating at '4'
The Outlook on the Long-term rating is Stable.
The affirmation of IB's Individual and National ratings reflect its strong profitability, capitalization and reasonable liquidity cushion. However, the enhanced concentration risks in a deteriorating credit environment arising from its rapid corporate lending driven growth, as well as limited income diversity constrain IB's Individual and National Long-term (LT) ratings.
The bank's profitability (reported net interest margin: 3.91% for the quarter ended 31 December 2008 "Q309") and RoA (annualized RoA 1.50% for the nine months ended 31 December 2008 "9M09") have been significantly above the systemic trend of the last five years. IB's comfortable excess Statutory Liquidity Ratio (SLR) position (5.38% as of 31 March 2008, "FY08") and strong bad debt recoveries (30% of non-interest income in FY08) have been key drivers of this performance. However, the excess SLR has run off and bad debt recoveries are likely to decline as legacy NPL stock reduces. This will make it difficult for IB to sustain its RoA at current levels, especially as its low cost deposit base is average (32% of total deposits in FY08), its focus on more competitive corporate lending continues to increase and credit costs are likely to rise. However, the bank's RoA could get some short-term support from a one-off write-back of provisions made on its high duration (3.34 years as of H109) available for sale investment book over the next one-to-two quarters.
A strong focus on write-offs and recoveries has enabled IB to fully recover from its legacy NPL problems which necessitated a recapitalization by the government of India (between 1998 and 2003). Consequently, its NPL ratios as of 9M09 (Gross NPL ratio: 0.92%, Net NPL ratio: 0.16%) ranked among the best in the Indian banking system. The bank has also strengthened its monitoring systems which would aid NPL management over the long term. However, its strengthened risk management systems are untested (through a cycle) and a growing part of its loan book (which has doubled in the last two years) is unseasoned. In such a scenario, the increased portfolio concentration (a significant part of which is to mid-corporates including those in stressed industry segments like commercial real estate, infrastructure and textiles) makes IB vulnerable to near-term asset quality deterioration.
IB's Tier I capitalization ratio - 10.63% as of 9M09 - is the best among government banks. The government's holding of 80% (the legally permissible minimum is 51%) and unutilized headroom for Tier 1 hybrids (up to 40% of Tier I) provide the bank with flexibility for enhancing Tier 1 capital as required. Fitch therefore expects IB to remain among the better capitalized Indian banks over the next 12-24 months. The bank's excess priority sector lending (6.33% of total loans as of 9M09 ) that can be sold to other banks, if necessary, and largely granular low cost deposits support liquidity.
IB is a mid-sized (17th largest by assets and deposits in FY08) government-owned bank with a strong franchise in south India. Listed on India's stock exchanges, it had 1,582 domestic and two overseas branches as of Q309.
(This is press release of Fitch Ratings)
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