Credit rating agency Crisil, a subsidiary of Standard & Poor?s, has downgraded two state-owned banks ? IDBI Bank and Corporation Bank.
The rating agency has revised its outlook on IDBI Bank?s long-term debt to ?negative? from ?stable?, while reaffirming the ratings at ?AA+/FAAA?.
The revision in outlook reflects the pressure on the bank?s earnings profile and its capitalisation levels in a scenario where the operating environment for the banking sector is expected to continue to be challenging, said Crisil on Thursday.
The agency expects the pressure on IDBI?s profitability and financial risk profile to continue. The bank?s earnings profile is marked by below-average profitability from core banking operations and high reliance on profits from sale of investments.
It believes that IDBI will continue to rely on high-cost wholesale deposits in the near term to meet its moderate growth targets, which will exert pressure on its earnings.
Reacting to the Crisil?s move, RK Bansal, CFO, IDBI, said, ?It applies to the entire banking sector. Rating is almost the same even with the changed outlook. It is their view,? he said.
The bank is currently in discussion with the Centre to convert the Tier I government bonds into equity capital, resulting in increase of government stake in the bank.
Crisil has also revised outlook on Corporation Bank?s lower Tier II bonds to ?negative? from ?stable?, while reaffirming the rating itself at ?AAA?.
The revision in outlook on the bank?s lower Tier II bonds reflects a weakening in the bank?s resource profile, resulting in a decline in its core profitability. With the proportion of the bank?s low-cost current and savings account (CASA) deposits to its total deposits shrinking, the bank has increasingly relied on high-cost bulk deposits to fund its asset growth.
As a result, its interest spreads has declined sharply as compared with that of its peers. Moreover, a moderate contribution from fee income further weakens the bank?s overall earnings profile.
?I do agree that the downgrading can?t be a good sign for investors. Also, our fee-based income needs to be improved. But we have been able to make a few achievements.? said, M Narendra, chief general manager , Corporation Bank.
