Icra cuts rating on IDBI Bank's bonds

Weak Q3 performance triggers rating review

Rating agency Icra has downgraded rating for IDBI Bank's various bonds from "AA" to "AA-" on the back of substantially weak operating and financial performance in the third quarter (Q) of the financial year (FY) 2016-17. The adverse performance in October-December 2016 quarter led to significant erosion in public sector lender's common equity tier I capital (CET-I).

The bank will be under significant pressure to meet the minimum regulatory level of 6.75 per cent required as on March 31, 2017, as the bank's CET-I stood at 7.24 per cent as on December 31, 2016, prior to adjusting the losses in nine months of FY17, Icra said in a statement.

The capital requirements are sizeable and immediate on the back of limited visibility on capital infusion and continued pressure on profitability. The outlook on the long-term rating continues to be negative.

Icra is closely monitoring the bank's capitalisation profile and its efforts to raise fresh capital by March 31, 2017, which will be a key rating sensitivity.

It posted the worst quarterly loss of Rs 2,255 crore in three months ended December 2016 as against a net loss of Rs 2,184 crore in October-December 2015.

The rating remains constrained by the continued stress on profitability and asset quality, slower pace of recovery of slipped accounts.

There has been sharper than expected deterioration in profitability and asset quality indicators which have impacted the earnings and capitalisation profile of the bank.

The losses during the Q3 of FY17 were high on account of one-time items like reversal of unrealised interest income of Rs 725 crore on standard assets under restructuring schemes like strategic debt restructuring (SDR) and Scheme for Sustainable Structuring of Stressed Assets (S4A), according to the Reserve Bank of India (RBI) guidelines.

The bank's earnings profile is likely to remain weak over the medium term given the high non-performing asset (NPA) generation rate, the relatively elevated size of the standard restructured book (6% of total outstanding advances) and relatively high un-provided NPAs (net NPAs of 9.61%.)