Moody’s Upgrades Rating Of Central Bank Of India And Indian Overseas Bank
The rating agency upgraded the long-term local and foreign currency deposit ratings of the two public sector banks to ‘Ba2’ from ‘Ba3’, according to its statement. It also upgraded the ratings of their respective baseline credit assessment and adjusted baseline credit assessment to ‘b2’ from ‘b3.’
While ‘Baa’ reflects “medium-grade risk” or moderate credit risk, a rating of ‘Ba’ means that the instrument has “speculative elements” with substantial credit risk, according to Moody’s website. Institutions with a ‘B’ rating from Moody’s are said to have a high credit risk. Public sector banks receive high ratings given their systemic importance in the Indian economy and sovereign backing.
The solvency of the Central Bank and Indian Overseas Bank improved after they received a capital infusion of Rs 4,240 crore and Rs 3,810 crore, respectively, according to Moody’s. The rating agency estimates that both the banks will achieve a common equity tier 1 ratio of 9 percent and 9.7 percent, respectively, by March-end. The estimate is based on the risk-weighted assets of the banks as on Dec. 31.
Bank of India received a total of Rs 14,640 crore in the government’s latest round of capital infusion, followed by Oriental Bank of Commerce at Rs 6,690 crore and Union Bank at Rs 4,110 crore. Canara Bank did not receive any capital infusion but its improved performance influenced the agency to reaffirm its rating.
All four state-run lenders are expected achieve the minimum regulatory level of 8 percent common equity tier 1 ratio comfortably by March 2019, it said. Bank of India is expected to reach a CET1 ratio of 10.7 percent, Oriental Bank of 10.2 percent and Union Bank of 9 percent after the latest fund infusion, according to Moody’s.
This rating action factors in the improvement in the six banks’ asset quality. The decline in net non-performing loans was driven by an increase in provisions with the banks using part of the capital received for this purpose, it said. The pace of new non-performing loan formation significantly reduced across the banks in the nine months ended December compared with the last three years, Moody’s said.
As the quantum of bad loans piling up fell, the six banks reported lower losses, stabilising their asset quality. Moody’s said this will help reduce the cost of credit, resulting in improved profitability.
The agency could lower the banks’ baseline credit assessment and ratings if further credit losses worsen their capital. Any indication that the government support for the banks has diminished could also lead to a downgrade, it said.