Fitch downgrades Canara Bank's viability rating

Rating agency Fitch today downgraded the viability rating of public sector lender Canara Bank. It, however, affirmed the long-term issuer default rating of State Bank of India, Bank of Baroda, Punjab National Bank and Canara Bank at ‘BBB-’.

Canara Bank’s viability rating was cut a notch to ‘BB+’ due to concern on the bank’s asset quality and higher cost of deposits. According to Fitch, these factors are likely to hit Canara Bank’s growth and market share. “Canara Bank has higher risk concentration in the troubled infrastructure sector, including state electricity boards, and a weaker funding profile,” Fitch said.

Viability ratings are designed to be internationally comparable and represent Fitch’s view on the intrinsic creditworthiness of an issuer. Together with the agency’s support ratings framework, it is a key component of a bank’s issuer default rating. Viability ratings also represent the capacity of a bank to maintain current operations and avoid failure, the latter indicated by extraordinary and company specific-measures becoming necessary to protect against a bank default.

As on September 30, Canara Bank’s non-performing assets (NPAs) in the large industries segment stood at Rs 1,462 crore, against Rs 522 crore a year earlier. Total NPAs rose from Rs 3,838 crore to Rs 5,610 crore, while the bank’s gross NPA ratio stood at 2.58 per cent as on September 30, against 1.75 per cent a year earlier.

For the quarter ended September, the bank recorded debt recast of large advances of Rs 6,500 crore. Overall restructuring stood at about Rs 15,000 crore. The bank’s net profit stood at Rs 661 crore, a fall of 22.44 per cent compared to the year-ago period, primarily due to higher provisioning towards bad loans. Fitch said among public sector banks, the potential for further loan restructuring was highest in the case of Canara Bank.

High cost of deposits was another concern for the Bangalore-based lender. Fitch said while most public sector banks had seen a rise in per-branch low-cost deposits, this wasn’t the case with Canara Bank. The bank’s net interest margin shrunk to 2.35 per cent in the quarter ended September, compared with 2.51 per cent in the year-ago period.

Fitch said the outlook on the issuer default ratings of the four banks was negative, which mirrored India’s rating outlook. “The issuer default ratings of the four government banks are driven by a high probability of extraordinary government support if required, given their high systemic importance. These banks account for about 32 per cent of the system assets and deposits, backed by a pan-India franchise of about 27,000 branches as of the financial year ended March (a little over 33,000, including State Bank of India’s five associate banks),” Fitch said.

At Canara Bank, the post of chairman and managing director has been vacant for more than a month, following the retirement of former chairman and managing director S Raman.