Moody's cuts standalone rating for IOB, OBC and Syndicate Bank

Falling asset quality; pressure on profitability drive rating action

Moody’s, the rating agency, on Monday downgraded its Standalone Bank Financial Strength Rating (BFSR) for three public sector banks – Indian Overseas Bank, Syndicate Bank and Oriental Bank of Commerce.

The reasons given were falling asset quality, pressure on profitability and capital generation.   

It revised IOB’s standalone rating from D to D- and revised the outlook from ‘stable’ to ‘negative’. However, it reaffirmed the Bank’s Baa3/Prime-3 foreign currency deposit ratings.

Moody’s cut Syndicate Bank’s BFSR to D from D+ and downgraded other instruments, including the local currency deposit rating, to Baa3/P-3 from Baa2/P-2 and the senior unsecured debt rating to Baa3. The foreign currency senior unsecured debt was cut to Baa3 from Baa2 on Syndicate Bank’s medium-term note programme.

In general, Syndicate Bank, like the others had lower asset quality, profitability and capitalisation levels than its regional peers, said Moody’s.

For OBC, the rating agency downgraded the standalone BFSR to D from D+. The global local currency deposit rating of OBC was cut to Baa3/P-3 from Baa2/P-2.The outlook on the bank deposit rating is stable.

The downgrade reflects OBC’s weak position when compared with domestic and global peers, particularly in relation to asset quality. More, OBC’s weak capacity to generate internal capital makes it reliant on government infusions to meet capital requirements, it said.

Moody’s outlook has been negative on the Indian banking system since November 2011. It reflects an operating environment characterised by slow economic growth, high inflation, high interest rates and a weak local currency. These factors lead to deterioration in asset quality, an increase in provisioning costs, and a fall in profitability, it has said.

It said: “The loan classification norms for restructured loans and provisioning practices are weak in India.”

It added: “They mask the extent of the banks’ asset quality and capital challenges. When we adjust for these, we find that many banks’ impaired asset levels are at or close to the assumptions we use under our adverse scenario for stress-testing purposes.

On the positive side, one anchor of stability for Indian banks is their strong business franchises. It supports their low-cost funding profiles, helping them maintain sizable lending margins, to sustain pre-provision earnings.”