Fitch downgrades Vijaya Bank

Written by fe Bureau | Mumbai | Updated: May 31 2012, 09:16am hrs
Fitch Ratings has downgraded public sector lender Vijaya Banks national long-term (LT) rating to Fitch AA-(ind) from Fitch AA(ind). The outlook for the bank is stable. The agency has also downgraded Vijaya Banks R900-crore lower tier 2 subordinated debt to Fitch AA-(ind) from Fitch AA(ind) and its R600-crore upper tier 2 subordinated debt to Fitch A-(ind) from Fitch AA-(ind).

The downgrade reflects continued deterioration in Vijaya Banks funding profile, which is weak compared with most Indian government banks. The ratings also reflect Fitchs expectations of continued weakening in the banks asset quality and moderate capitalisation, the ratings agency said.

The national long-term rating is on account of Fitchs view of continued financial support from the government of India (GoI), given GoIs 55% ownership and the banks regional stature. The government injected R1,200 crore in the form of perpetual non-cumulative preference shares and R370 crore in the form of equity into Vijaya Bank in the financial year 2010-11. In March 2012, the bank received R150 crore indirectly as equity through Life Insurance Corporation of India (LIC).

The downgrade of the banks hybrid debt rating (upper tier 2) reflects Vijayas weakened stand-alone credit profile. Vijayas funding is weak and continues to deteriorate. The banks institutional funding (deposits greater than R10 crore) as a proportion of total deposits is among the highest in public sector banks (PSBs), a statement said.

Fitch noted that Vijayas proportion of stressed assets rose sharply in the financial year 2011-12 to 8% from 5% in the previous fiscal, with non-performing loans (NPLs) increasing to 2.93% (2.56% in 2010-11) and 2.6% of loans were restructured during the year. The proportion of stressed assets may rise further in view of Vijay Banks high exposure to troubled sectors such as power generation, electricity distribution companies, roads and ports, commercial real estate and iron & steel. The agency also notes that the banks provision coverage on NPLs (41.9% in FY12) is low and inadequate to absorb increased losses, especially when its restructured assets attract only 2% provisioning.

Though Vijaya Banks reported capitalisation (Tier 1: 9.7% in 2011-12) compares well with its peers, this is viewed by Fitch as not particularly strong considering its deteriorated asset quality and high net NPLs/equity (26% in 2011-12), the statement said.