The country’s largest portfolio investor, Life Insurance Corporation of India (LIC), has been put under review, leading to a possible downgrade, by Moody’s, the global rating agency.
Reason: The financial behemoth’s high exposure to sovereign debt and lack of revenue sources from outside India.
Besides LIC, three top private sector banks — ICICI, HDFC and Axis — are also staring at a possible downgrade by the agency.
This comes less than a week after rival agency Standard and Poor’s (S&P) cut India’s credit rating outlook from stable to negative.
What the rating agency says: “Moody’s believes that the credit quality of financial institutions, with high levels of domestic sovereign debt holdings, and low geographically diversified revenue and earnings sources, is closely linked to the sovereign’s credit strength”
... at LIC
- Direct exposure to domestic sovereign debt
- Revenue and earnings diversification
- Extent of dependence on economic environment
- Strength of guarantee by the sovereign to LIC’s policyholders
... at ICICI Bank, HDFC Bank and Axis Bank
- Cross-border diversification of operations
- Domestic sovereign debt holdings
India sovereign: Baa3 with a stable outlook
LIC: Baa2 with a stable outlook
The three banks: Financial strength rating or baseline credit assessments of C-/Baa2
“Moody’s believes the credit quality of financial institutions, with high levels of domestic sovereign debt holdings and low geographically diversified revenue and earnings sources, is closely linked to the sovereign’s credit strength,” said a statement from the agency. “Issuers with these characteristics are unlikely to have standalone credit assessments above the sovereign.”
Adding: “As such, LIC’s rating needs to reflect more closely the risk the company shares with the Indian sovereign (Baa3/stable).” LIC’s current rating is Baa2/stable, positioned above India’s sovereign debt rating of Baa3/stable.
LIC officials, however, said the move reflected the sovereign rating outlook for India and did not reflect their own financial health. “Our investments are in line with the regulations, which mandate 50 per cent of our total investment in government securities. It will not have any impact on our functioning and financials,” an official added.
During 2011-12, its investments were Rs 2 lakh crore. Of these, Rs 50,000 crore were in equities and the remaining Rs 1.5 lakh crore in debt instruments. “More than 55 per cent of debt instruments are in government securities, which is the most secured investment papers,” the official added.
As of December 31, 2011, said Moody’s, government securities and government guaranteed bonds represented 54 per cent (Rs 6 lakh crore or $111 billion) of the insurer’s total cash and invested assets (excluding unit-linked invested assets), and 764 per cent of adjusted shareholders’ equity. Almost all the net premiums earned were from India.
It also raised concerns about LIC’s recent exercise to raise holdings in public sector banks through equity investments, and the purchase of shares of Oil and Natural Gas Corporation.
On the three private banks, the agency said, “Moody’s believes the creditworthiness of financial institutions with low cross-border operational diversification and/or high balance-sheet exposures to the debt of their domestic sovereign is closely linked to that sovereign’s credit strength. Banks with these characteristics are unlikely to have standalone credit assessments above the sovereign, which is often viewed as the lowest credit risk in the local market or currency.”
However, bankers are not perturbed by the possible ratings downgrade. Bankers said it would not have any “significant impact” on their operations or fund raising capabilities.
“It is hardly a surprise. Typically, the rating assigned to banks by the agencies is a notch below the sovereign rating. In the case of some of these banks, the current rating is higher than India’s sovereign rating. Hence, the review decision,” said a banker, requesting anonymity.
Last week, S&P cut India’s rating outlook to negative from stable, citing a worsening external sector situation, slow pace of fiscal consolidation, inflationary pressures and sluggish economic growth. Moody’s, however, in sharp contrast, said its long-term outlook on India remained stable. Moody’s issued a paper recently that it had a Baa3 rating on India, while Fitch rated India BBB-. Both are also the minimum investment grade ratings.