After having trended lower since Q1FY19, the total stressed assets rose in Q4FY19 with the downgrades across financial services.

By Vinayak Aggarwal

India Ratings & Research (lnd-Ra) has revised the outlook on IDFC First Bank’s Rs 33,642 crore worth of ‘AA+’ rated non-convertible debentures (NCDs) from stable to negative on the expectation of rise in credit costs, the bank informed the exchanges on Thursday.
“The bank could be adversely affected by the rise in credit costs from the recent sharp downgrades of certain exposures in its credit substitute book (investments) and incremental provision from the legacy stressed book, as the provision coverage on the legacy stressed portfolio has moved lower,” Ind-Ra said in its rationale.

After having trended lower since Q1FY19, the total stressed assets rose in Q4FY19 with the downgrades across financial services. The stressed assets accounted for 8.3% of the gross advances in FY19. The provisions against the stressed book, excluding security receipts, moderated to 55.9% in FY19 from 76.1% in FY18.

“IDFC First Bank’s cost-to-income ratio rose above 75% the second half of FY19, and it is likely to remain elevated in the medium term, largely due to branch expansion plans. This would add to the pressure on the bank’s internal accruals, thereby causing the capital buffer to deplete at a higher rate,” Ind-Ra said

The change in outlook also reflects the subdued profitability on account of higher-than-anticipated operating expense, primarily resulting from investments in the branch network, thereby reducing the availability of operating buffers to absorb volatility in credit costs, the rating agency added.

The ratings, however, remained unchanged at ‘IND AA+’ supported by the bank’s stable capital buffers, comfortable liquidity position, and the increased portion of the retail book post the merger, thereby leading to a rise in net interest margins.
In 2016, the bank had ‘AAA’ rating which were downgraded to ‘AA+’ in June 2018.