Moody’s Investors Service on Monday lowered Indian Overseas Bank’s (IOB) outlook to negative from stable and changed its subordinate medium-term note (MTN) and junior subordinate MTN programme ratings to (P)B3 and (P)Caa1, respectively.
Moreover, the bank’s baseline credit assessment (BCA) and adjusted BCA was downgraded to b3 from b2. Moody’s said that the downgrade of IOB’s BCA reflects the significant deterioration in the bank’s asset quality and continued weakness in its profitability and capital position.
“While most Indian public-sector banks have started to witness a moderation in the pace of new problem loans formation, IOB has been the outlier, recording the highest new problem loan formation rate among Moody’s-rated Indian banks for the quarter ended June 2015,” it said.
The agency added that IOB’s loan exposure to stressed sectors in India — namely iron & steel, power and other infrastructure segments — indicate that the bank’s asset quality could come under further pressure.
“Poor asset quality has also eroded IOB’s profitability, with the bank reporting losses for the financial year ended March 2015 and for the half-year ended September 2015,” it said, adding that the bank’s continued very weak earnings profile resulted in the imposition of a prompt correction action (PCA) by the Reserve Bank of India (RBI) in October 2015.
While the PCA, Moody’s said, will not have any impact on the bank’s growth prospects, it does not expect any improvement in the bank’s profitability performance until the end of the fiscal year ending March 2016, given the uncertainties around the bank’s asset exposure.
In October 2015, IOB received Rs 2,000 crore as a capital infusion from the government. “If the infusion is taken into account, the bank’s common equity Tier-1 level would have registered 6.86% at end-September 2015, a level that is still low when compared to the other Indian public-sector banks,” it said.
Moody’s said it expects that IOB will remain dependent on capital infusions from the government, given its weak internal capital generation capabilities. The ratings come go down, it said, if there are indications that government support has diminished or that additional capital requirements could arise beyond the government’s budgeted amount would also pressure the bank’s ratings.