Dena Bank risks negative rating action

Public sector bank Dena Bank runs the risk of negative rating action if the government, its major owner with 58 per cent stake, does not infuse additional equity capital in 2015-16, according to India Ratings. The rating agency affirmed Dena Bank's long-term issuer rating at 'IND AA-' with a 'stable' outlook. The affirmation factors in its status as a government bank and moderate systemic importance with 1.2 per cent share each system assets and deposits in FY14.

The government is infusing Rs 140 crore in the bank in 2014-15 based on its past performance. Dena's operating performance has been lagging its peers, which might limit the government's contribution in the bank's large capital requirement (Rs 2,600 crore) under Basel-III transition. According to India Ratings, the bank's capitalisation is modest, with an estimated common equity Tier-I at 7.3 per cent as of December 2014. The bank can raise Rs 220 crore at current market capitalisation on dilution of government stake to 51 per cent. The bank's limited ability to raise adequate capital in FY16 could substantially moderate its asset growth prospects. This might reduce its market share in bank assets and its systemic importance and could warrant a revision of the rating outlook.

The rating could result in a decline in bulk deposits, which means a sharp reduction in operating costs. A strong improvement in asset quality could result in a rating upgrade of the hybrid instruments, India ratings said.

The bank's standalone credit profile factors in moderate franchise on both assets and liability sides and high exposure to stressed sectors. Dena Bank's high exposure to troubled sectors is likely to further increase the pressure on its asset quality.

While the bank's exposure to infrastructure declined marginally to 18.6 per cent of the total loans in December 2014 from 20.2 per cent in FY13, its exposure is unchanged to metals (5.3 per cent) and textiles (5.5 per cent) sectors. The bank's total stressed assets (gross non-performing assets and restructured standard assets) stood at 15 per cent in the nine months ended December 2014.