Fitch downgrades IndusInd Bank rating to negative

Mumbai, Sept 29 | Updated: Sep 30 2006, 05:31am hrs
Fitch ratings on Friday revised the ratings outlook on IndusInd Bank Ltd (IBL) to negative from stable. At the same time, the agency has also assigned an A national long-term rating to IBLs Rs 50 crore upper tier two bonds with a negative outlook.

The revision in outlook reflects the reduction in the capital adequacy ratio (CAR) of the bank. IBLs regulatory CAR fell to 9.8% at June 2006 (March 2006: 10.5%, tier 1: 6.8%) and its equity to assets ratio (4.5% at June 2006; 4.9% at March 2006) is the lowest in the national rating category among Indian banks rated by Fitch.

The CAR had been affected by the deduction of credit enhancements for securitisation transactions in the financial year ending March 2006 ; the bank had issued tier two capital, including upper tier two capital, and temporarily offloaded some loans from its balance sheet in order to shore up CAR. Fitch notes, however, that an equity infusion is important to support the banks long-term improvement in performance.

The fundamentals of IBLs long-term improvement were put in place following the write-off of the legacy corporate non-performing loans and the addition of the more profitable retail business to IBLs portfolio through the merger with Ashok Leyland Finance in FY04.

The Outlook

The revision in outlook reflects the reduction in the capital adequacy ratio (CAR) of the bank
An equity infusion is vital to support the bank's long-term performance
The net interest margin came under pressure due to competition in the commercial vehicle financing business

The banks asset quality (gross NPL ratio: 2.9% at March 2006) and business profile have improved following these developments. Fitch, however, notes that its operating performance has been weak in FY06 and Q107.

IBLs net interest margin (2% in FY06, 2.9% in FY05) came under pressure due to intense competition in the commercial vehicle financing business (30% of IBLs loan portfolio), the rising cost of funds and the elimination of upfront profits on sale of securitised assets.

Although yields on incremental loans have improved over the past quarter in line with systemic trends, a repricing of the entire loan portfolio would only take place over the next 18 to 24 months.