CARE downgrades Dhanlaxmi Bank's tier II bonds

Continuing losses, falling asset quality remain trouble spots

CARE Ratings has cut rating for Dhanlaxmi Bank's lower Tier-II bonds from “BBB-” to “BB+” on account of continued losses in the first quarter, falling asset quality and low capital adequacy. It also downgraded upper Tier bonds’ rating from “BB+” to “BB”.

The Kerala-based private sector lender has posted a net loss of Rs 22.71 crore in the first quarter ended June 2015 (Q1 FY16) as against net profit of Rs 3.03 crore in Q1 of FY15. It had booked a loss of Rs 241.47 crore in 2014-15.

In a statement, CARE Ratings said notwithstanding the  improvement  in operating  profit  in  FY15  and Q1FY16,  higher  provisions  resulted  in  loss  during  these  periods. The steps taken by the bank such as increasing the share of low-cost deposits, focus towards retail and MSME loans are expected to aid in improving profitability in the long run, it added.

Its asset quality fell in FY15 and continued to deteriorate in Q1 of FY16. Its gross non-performing assets were elevated at 8.45 per cent in June 2015, up from 7.17 per cent a year ago.

The bank was  allowed  to  make  provisions  for two accounts over  a  period  of  three or four quarters, according to RBI guidelines,  but opted to make the entire  provisions in  Q4FY15  itself.  Higher provisions had resulted in the bank reporting significant losses in FY15.

On account of losses, capital adequacy ratio (CAR) declined to 9.20 per cent (Tier-I CAR of 7.29 per cent) as on June 30, 2015 from 9.59 per cent (Tier-I CAR of 7.42 per cent) as on March 31, 2015.

CARE said in case of any furt-her losses, timely mobilisation of capital is critical to maintain the CAR above regulatory  level  of  nine per cent (Tier I CAR of  seven per cent).  At the same time, given its performance over the past few years and volatile capital markets, mobilisation of equity in timely manner is likely to be challenging.