Global rating agency Moody’s Investor Service downgraded the rating on deposits of Central Bank of India and Indian Overseas Bank, citing weaker standalone credit quality of the lenders.
The rating on domestic and foreign deposits of both the banks was cut to Ba1 from Baa3. The rating agency retained the negative outlook on the ratings of Central Bank of India deposits, indicating further downgrade is probable.
At the same time, IOB’s senior unsecured debt, issued from its Hong Kong branch, was also downgraded to Ba1 from Baa3. The move comes after the government said it would differentiate between public sector banks and infuse capital only into those that have strong performance metrics, especially return on asset and return on equity.
As of September 2014, Central Bank of India’s return on assets was 0.19%, while its return on equity was 3.4%. Return on asset of Indian Overseas Bank fell to 0.14% from 0.18% a year ago. Moody’s noted that the government’s move to change criteria and stress on profitability of banks for capital infusion is a big change from the earlier practice of infusing capital into banks that were actually weaker.
“CBI and IOB have the weakest standalone credit profiles among Moody’s rated Indian banks, as indicated by their baseline credit assessments (BCA) of B3 and B2, respectively,” said Moody’s in its release. Moody’s takes into account the standalone credit profile of banks to rate them apart from considering the country’s rating as a ceiling. Moody’s has given a Baa3 sovereign rating to India.
Central Bank of India and Indian Overeas Bank were not among the receivers of capital infusion in the last round. The government infused Rs 6,990 crore into nine banks based on their profitability in 2014, out of the budgeted Rs 11,400 crore. In the Union Budget, the government allocated Rs 7,940 crore towards capital infusion.
South-based Indian Overseas Bank has an asset size of Rs 2.8 lakh crore as of September. Central Bank of India’s assets total Rs 2.9 lakh crore.