Moody’s Flags Off ‘Heightened Risk’ To IDBI Solvency Position As Bank Plans Austerity Measures
IDBI Bank wants to improve asset quality, reduce corporate exposure
International rating agency Moody’s Investors Services has downgraded various securities of IDBI Bank, it said in a statement on Thursday. Moody’s follows ICRA and Crisil in raising concerns about the bank’s weak capital position and the high level of stressed assets on its books. The lender, on its part, issued a statement saying that it will look at all avenues to improve its capital position and put the bank on a recovery track.
“The rating actions reflect the significant deterioration in IDBI's financial profile, driven by asset quality issues and the heightened risk to its solvency position,” said Moody’s in its rating release. “Its capitalization position is extremely weak,” Moody’s added.
As part of the ratings action, Moody’s downgraded senior and subordinated unsecured bonds under the bank’s medium term note (MTN) programme. It also downgraded IDBI Bank’s local and foreign currency bank deposit ratings.
The rating agency also downgraded IDBI Bank’s baseline credit assessment (BCA) and adjusted BCA to caa1 from b1.
Solvency refers to asset quality, capital position and profitability of the bank, while our financial profile looks at both solvency and liquidity, as represented by its BCA- a measure of the probability of standalone failure. Typically, a bank undergoing a BCA event would carry a BCA of ca, which is three notches below caa1.Alka Anbarasu, Vice President- Financial Institutional Group, Moody’s Investors Service
Moody’s said it expects asset quality pressures to persist for the next 12-18 months, which will put pressure on the bank’s profitability and its ability to generate internal capital. The rating action would be reviewed after looking at the bank’s asset quality performance, any government capital infusion and any form forbearance from the Reserve Bank of India (RBI), Moody’s said.
For fiscal 2017, the bank reported a net loss of Rs 5,158 crore. This is the second consecutive year of losses for the bank, which reported a net loss of Rs 3,665 crore in fiscal 2016. The bank has a gross non performing assets (NPA) ratio of 21.25 percent and a net NPA ratio of 13.21 percent – the second highest in the industry.
The bank has also seen its capital base erode significantly.
According to the bank’s analyst presentation, the common equity tier-1 ratio (CET-1), including the capital conservation buffer (CCB), fell to 5.64 percent as of March 2017 compared to 7.98 percent in March 2016. The overall capital adequacy ratio for the bank fell to 10.70 percent.
Noting the bank’s weakening financial position, domestic rating agencies Crisil and ICRA too have downgraded a number of the bank’s debt instruments.
IDBI Bank Proposes Measures
In response to concerns raised around the bank’s finances, the management released a statement saying that the bank is working on a comprehensive turnaround strategy with a focus on augmenting the capital base and recovering bad loans.
“Given the stress in the corporate sector, the bank will restrict growth in the corporate loan book and focus on increasing retail and priority sector asset base. This will help the bank to reduce risk weighted assets and improve CAR (capital adequacy ratio) in the short term,” Mahesh Kumar Jain, managing director and CEO of the bank said in a statement.
The bank is also planning to raise capital in the medium term, the statement said while adding that the timing of this capital raise would depend on the markets. Additionally, capital levels would be improved through sale of non-core assets, continued government support and churning of corporate loan book to reduce risk weight of the portfolio, it added.
We are looking at all avenues to improve our capital position and bring the bank on the recovery track. We will look at aggressive recovery and cost cutting measures and plan on churning our corporate book and risk weighted assets which should also ease the pressure on capital. The government of India, our principal shareholder, continues to support the bank.Mahesh Kumar Jain, MD & CEO, IDBI Bank
On Wednesday, BloombergQuint reported that the government has placed some restrictions on IDBI Bank following its weak results. The government’s orders, which came as clauses in a memorandum of understanding (MoU) it signed with banks, asked IDBI Bank to curtail cost, rejig its deposit base and push for recoveries.
Earlier this month, IDBI Bank was placed under Reserve Bank of India’s (RBI) prompt corrective action (PCA) framework. Owing to the bank’s high NPA ratio and its worsening capital position, it is possible that it would be placed under the highest risk category of the framework, BloombergQuint had reported.