International credit rating agency Standard & Poor's on Sunday downgraded IDBI Bank to 'BB' citing "very weak asset quality" but maintained a stable outlook on the state-run lender.
"S&P Global Ratings today lowered its long-term foreign currency issuer credit rating on IDBI Bank to 'BB' from 'BB+' because we expect the bank's asset quality to remain very weak over the next 12 months," said S&P Global Ratings credit analyst Nikita Anand in a note.
Though it has maintained a stable outlook for the lender, it has lowered the issue ratings on the bank's senior unsecured notes to 'BB' from 'BB+'
But the agency was quick to add that it expects the bank's stressed assets to continue to increase as the recognition norms improve.
IDBI Bank's nonperforming loans ratio rose sharply to 15.2 per cent in the December quarter from 10.9 per cent in March 2016. It reported a loss of Rs 3,660 crore in fiscal 2016 and Rs 1,960 crore in the first nine months of fiscal 2017.
"Moreover, we expect its earnings to remain weak over the next 12-18 months largely because of high credit costs and lower net interest margins, making the bank dependent on external capital infusions to meet its regulatory capital requirement," she said.
This deterioration was greater than its expectations and the bank has a large amount of strategic debt restructuring. "Its standard restructured loans, at 7.2 per cent of total loans, also remain higher than its peers. All these factors reflect a significant weakness in the bank's asset quality," she said.
"Our view is based on the bank's customer concentration and a sizable exposure to the highly vulnerable corporate and infrastructure segments," she added.
The agency has reassessed the bank's risk position score to very weak from weak. Accordingly, it as lowered IDBI's stand-alone credit profile to B- from BB-.
One of the main reason for the very weak credit quality arises from the fact that IDBI has high single-name concentration, she said, adding its exposure to the top 20 customers was about 222 per cent of the bank's equity as of March 2016, higher than the peer average (168 per cent for the top five public sector banks.
Moreover, IDBI also has high exposure to the troubled infrastructure segment (25.7 per cent as of December 2016) making it more vulnerable than its peers.
Negative retained earnings led its capital base to decline with tier 1 ratio falling to 8.5 per cent as of December 2016, which is marginally higher than the mandated buffer of 8.25 per cent.