Rating agency Icra today downgraded various debt instruments of IDBI Bank owing to a significant erosion of it’s common equity tier I (CET 1), following weak financial performance of the bank in the quarter ended December. Icra has downgraded ratings for the bank’s Rs 8,000 crore infrastructure bonds programme, Rs 230.50 crore flexi bonds series and Rs 25,742.72 crore senior and lower tier II bonds programme.
The rating agency also downgraded the rating for the bank’s Rs 5,000 crore Basel III complaint tier II bonds to AA-(hybrid) from AA(hybrid), for the Rs 2,500 crore additional tier I bonds programme under Basel III to A(hyb) from A+(hyb) and for the Rs 4,286.20 crore upper tier II and Rs 1,708.80 crore Basel II compliant perpetual bonds programme to A+ from AA-.
“The rating downgrade takes into account the substantially weak operating and financial performance of the bank during the third quarter of the financial year 2016-17 which has resulted in a significant erosion of the bank’s capital (CET-I),” Icra said in a statement here today.
It expects the bank to be under significant pressure to meet the minimum regulatory level of 6.75 per cent required as on March 31, 2017 as the bank‘s CET I stood at 7.24 per cent as on December 31, 2016, prior to adjusting the losses in nine month to the financial year 2016-17.
With limited visibility on capital infusion and continued pressure on profitability, the capital requirements are sizeable and immediate, it said.
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“Accordingly, the outlook on the long-term rating continues to be negative and we are closely monitoring the bank’s capitalisation profile and its efforts to raise fresh capital by March 31, 2017, which will be a key rating sensitivity,” the rating agency said.
It said the bank’s rating remains constrained by the continued stress on profitability and asset quality, slower pace of recovery of slipped accounts and the sharper than expected deterioration in profitability and asset quality indicators which have impacted the earnings and capitalisation profile of the bank.
The losses during the third quarter were also high on account of one-time items like reversal of unrealised interest income of Rs 725 crore on standard assets under SDR and S4A.
“In our opinion, the bank’s earnings profile is likely to remain weak over the medium term given the high NPA generation rate, relatively elevated size of the standard restructured book and relatively high un-provided NPAs,” the agency said.
The bank’s asset quality has seen impairment in the last few quarters following the RBI’s asset quality review (AQR) in the second half of the financial year 2015-16 and subsequently the continued slippages during the nine month of the fiscal 2016-17.
The bank’s gross NPAs increased from 5.88 per cent level as on March 31, 2015 to 10.98 per cent as on March 31, 2016 and further to 15.16 per cent as on December 31, 2016, while the standard restructured advances remained elevated at near 6 per cent as on December 31, 2016.
Despite the limited growth in the bank’s advances, weakening asset quality has resulted in an increase in risk weighted assets and further weakening of capitalisation as reflected by CET I capital levels of 7.24 per cent as on December 31, 2016 as against 7.98 per cent as on March 31, 2016.
Given the pressure on asset quality, and declining CET I levels, the bank’s ability to prevent further slippages, increase resolution of stressed accounts and raise equity capital in the next few quarters will be key rating sensitivities, it said.