S&P Maintains IDBI Bank’s Rating On Credit Watch With Negative Implications
Global rating agency S&P on Thursday said it’s ‘BB’ long-term and ‘B’ short-term issuer credit ratings on the state-run IDBI Bank Ltd. continues to remain on credit watch with negative implications, due to uncertainty on the lender's ability to meet capital requirements.
The agency said the bank remains in breach of its regulatory capital requirements following a loss in the second quarter of the current fiscal. Higher provisioning for bad loans and lower interest income pulled IDBI Bank's losses to Rs 3,602 crore in the July-September period from Rs 198 crore in the year-ago quarter.
The lender's tier-1 capital ratio stood at 4.22 percent, well below the minimum regulatory requirement of 7 percent.
“The continuing placement reflects the uncertainty regarding the bank’s ability to meet its capital requirements in the near term,” the rating agency said. It, however, sees the breach in capital requirement to be temporary.
The Life Insurance Corporation is in the process of increasing its stake in the bank to 51 percent. It had raised its stake from 7.98 percent to 14.9 percent in October, resulting in a Rs 2,090 crore injection.
IDBI Bank’s managing director and chief executive officer Rakesh Sharma on Wednesday told reporters that it expected a Rs 20,000 crore capital from LIC once the deal gets approved from the Competition Commission of India and the Securities and Exchange Board of India.
The rating agency said plans by the LIC to increase its stake in IDBI to 51 percent could restore the capital position. "That said, some uncertainty remains around the timing of the potential investment in the bank," it added.
A potential majority-stake investment by LIC remains contingent on clearance by the CCI and a resolution of a court case by employees, it further said. S&P feels that post the resolution of these issues, the bank would be in a position to issue shares to LIC, and thus boost capital.
"We could remove the ratings from credit watch once there is further clarity on the timing of this deal," it said, adding that they believed necessary regulatory approvals were already in place from the Reserve Bank of India and the IRDAI."
Capital infusion from LIC would also temper likely weakness in asset quality and earnings in the second half of financial year 2019, according to the agency.
The bank's capital shortfall to meet its tier 1 regulatory minimum was about Rs 5,340 crore as on Sept. 30.
The rating agency feels despite the lender's weak standalone credit profile, it is unlikely to default in the next 12 months, given the ongoing capital support from the government and high confidence of the public in government-owned banks, including IDBI.