S&P downgrades rating for Indian Overseas Bank

S&P in a statement said the asset quality is expected to remain weak over the next 12 months and revised assessment of the bank's risk position to "weak" from "moderate"

Global rating agency Standard & Poor's (S&P) has cut long-term issuer rating for Indian Overseas Bank (IOB) from “BBB-“ to “BB+” on sharp deterioration in the asset quality.

The outlook is stable.

IOB’s reported non-performing loan ratio rose sharply to 7.3 per cent at the end of September 2014, from 5 per cent as of March 31, 2014. The share of gross standard restructured loans outstanding in IOB's loan book is also high at 7.85 per cent.

S&P in a statement said the asset quality is expected to remain weak over the next 12 months and revised assessment of the bank's risk position to “weak” from “moderate”.

The rating continues to reflect IOB's “adequate” business position, “moderate” capital and earnings, “above average” funding, and “strong” liquidity.

S&P said it still sees a “very high” likelihood that the government of India will provide timely and sufficient extraordinary support if the bank comes under financial distress. “We expect IOB's credit costs to remain high because of the bank's weak asset quality,” said Standard & Poor's credit analyst Amit Pandey.

It could be another two quarters before the pace of creation of stressed assets starts receding for the industry as a whole and IOB in particular.

IOB's aggressive growth over the past several years has stressed its internal control system. Moreover, bank's focus on the corporate segment brings in some concentration in that segment. Its exposure to high-risk sectors, such as iron and steel and textiles, is also greater than peers', rating agency added.