Fitch revises outlook on IDBI Bank’s IDR to ‘negative’

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Published: April 2, 2020 4:20:58 AM

The rating agency said that IDBI Bank's financial profile remains weak and its performance is not immune to the worsening operating environment due to the novel coronavirus pandemic.

The government directly owns 47% of IDBI Bank and holds another 51% indirectly through LIC.The government directly owns 47% of IDBI Bank and holds another 51% indirectly through LIC.

Fitch Ratings on Wednesday revised the outlook on IDBI Bank’s long-term issuer default rating (IDR) to ‘negative’ from ‘stable’, while affirming the IDR at ‘BB+’.

The negative outlook reflects our expectation that the state’s propensity to provide extraordinary support to IDBI Bank may diminish following the government’s proposal to sell its stake in the bank and partial stake in IDBI Bank’s majority shareholder, Life Insurance Corporation of India (LIC),” the rating agency said.

The government directly owns 47% of IDBI Bank and holds another 51% indirectly through LIC. The government had announced its intention to sell its 47% stake in IDBI Bank and dilute part of its 100% shareholding in LIC through a market listing in its Budget in February. The Reserve Bank of India also expects LIC to gradually reduce its shareholding in IDBI Bank over a 12-year period. However, the sale is not an imminent risk due to the sharp correction in the equity index and IDBI Bank’s share price.

The agency has also affirmed the bank’s viability rating at ‘ccc’, reflecting high fundamental credit risk. Following substantial equity injections from the government and LIC in recent years, the bank’s capital position has improved, while absolute impaired loans have been declining and loan-loss cover has been rising. Similar to most other banks, retail loan growth has been high at IDBI Bank, which, along with SME loans, can erode the bank’s already weak income buffers as the environment deteriorates, Fitch said.

The rating agency said that IDBI Bank’s financial profile remains weak and its performance is not immune to the worsening operating environment due to the novel coronavirus pandemic. However, the agency said that the risk of the bank failing had not increased.

Fitch also said that the bank’s earning potential would remain weak, even though loan-impairment charges (8% of loans) are expected to decline in FY21. The agency said that IDBI Bank’s common equity tier-I (CET1) ratio of 10% at M9FY20E is less commensurate with its balance sheet risks, as its capital buffers can be vulnerable to even moderate shocks.

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