ICRA downgrades long-term rating for IDFC First Bank from AA+ to AA

Rating agency ICRA has downgraded the long-term rating for IDFC First Bank from "AA+" to "AA" due to weak earnings profile. Its cost to income ratio is elevated due to ongoing branch expansion plans.

The rating action also factors in an increase in credit provisions on account of unanticipated fresh stressed exposures identified by the bank in Q4FY19, ICRA said in a statement on Tuesday.

The bank’s earnings profile remains weak, given its dependence on wholesale deposits. Despite the strong growth in current account and savings accounts (CASA) deposits, its share in overall liabilities remains low. This leads to a higher cost of interest-bearing liabilities compared to other banks.

Going forward, the ongoing branch expansion drive (600-700 branches to be added over the next few years) will aid franchise expansion. Also, the ability to maintain the traction in CASA deposits will drive the improvement in the earnings profile in the medium to long term, ICRA added.

ICRA said IDFC First’s return on assets (RoA) may remain muted in FY20 due to the ongoing investments in the expansion of the retail franchise and possible credit provisions on stressed exposures.

The ratings continue to be supported by the bank’s capitalisation. Despite expectations of moderate profitability, the capital requirement will not be a constraint for growth in the near to medium term. Further, the share of retail assets has improved with the merger, the rating agency said.

The bank has also stepped up focus on improving the granularity of the loan book, while gradually scaling down the wholesale book, which is likely to temper the pace of capital consumption.