Moody's upgrades IDBI's foreign currency rating; outlook labeled positive

Rating agency Moody’s has upgraded IDBI Bank’s foreign currency rating from B1 to Ba2 after the bank received fresh capital from the state owned insurance behemoth -- Life Insurance Corporation.

The public sector lender received capital to the tune of Rs 5,030 crore from the allotment of new shares to LIC in January 2019. Further, it had received Rs 14,500 crore in capital from LIC in December 2018.

This capital infusion will help the public sector lender to negotiate better terms on its foreign fund raising exercise, mainly from its branch in Dubai International Financial Center.

According to Moody’s, “The capital infusion will enable the bank to increase provisions for bad loans, which when combined with stabilizing asset quality, will result in lower credit costs and improve profitability in 2020”.

The local and foreign currency bank deposit rating of IDBI has also been upgraded to Ba2 from B1.

“We believe that government support remains very high even though direct government ownership has declined. We expect that support will flow through LIC as LIC is 100 per cent government owned and therefore the ultimate support provider to IDBI remains the Government of India”, said Moody’s in a statement.

Moreover, Moody’s has given a positive outlook to the bank as it expects the non-performing asset (NPA) formation of the bank to decline significantly given the amount of NPA recognition done by the bank already.

“If some of the capital received is used to increase provision coverage, profitability can improve significantly as a result of lower future credit costs. The positive outlook factors in this scenario”, said Moody’s in a statement.

IDBI Bank’s gross NPA was 31.8 per cent and the net NPAs was 17.3 per cent, one of the highest among the banking sector as of September 2018. The rating agency expects the bank to increase its write offs and lower the stock of NPAs in the near future.

The capital infusion done by the public sector insurer, LIC, will also help the bank in increasing its Common Equity Tier 1 capital by ten percentage points based on the bank’s risk weighted assets as of September 30, 2018. The bank’s baseline credit assessment has also been upgraded to b2 from caa1.

Although the asset quality of the banks saw huge deterioration, it’s funding and liquidity was, however, unaffected and remained robust, said rating agency Moody’s.