Fitch downgrades Vijaya Bank's outlook to negative

On the back of increased dependence on wholesale funds like certificates of deposits (CDs), rating agency, Fitch has downgraded the outlook on state-owned Vijaya Bank's outlook to negative from stable and affirmed its national long-term rating at 'AA(ind)'.

The rating agency warned that the rating could be downgraded further should the public sector lender continue to depend on CDs in the coming quarters.

“The negative outlook reflects Vijaya Bank's stressed funding profile at end-March 2011 (FY11) due to its increased dependence on wholesale funds, particularly certificates of deposits (CD). While the reliance reduced in FY10, it reversed in FY11 with loan to customer deposits (excluding CD) of 89% at end-March 2011, significantly higher than most government banks,” Fitch said in a release.

The rating agency also said that high institutional funding could “significantly” impact its net interest margins (NIMs) in the present rising interest rate scenario, however, high refinancing pressures can be mitigated to some extent by the lenders's status as a government bank.

“Should Vijaya Bank continue to depend on wholesale funds (particularly CD), its rating may be downgraded by a notch to 'AA-(ind)' to reflect the risk of greater return on asset (ROA) volatility. The outlook could be revised back to stable if there is a sustainable improvement in Vijaya Bank's funding profile and profitability, and stabilisation in asset quality,” the report said.