S&P says slippages from IOB's recast debt book to continue

Affirms bank's ratings; maintains stable outlook

Affirming its credit ratings for Indian Overseas Bank (IOB), Standard & Poor's (S&P) on Thursday said the public sector lender, whose stressed assets are about 20 per cent of its loan book, will continue to witness slippages from the restructured loan book. The chances of rating upgrade for the Chennai-based bank were remote in the next 12 months.

S&P affirmed its 'BB+' long-term issuer credit rating and “B” short-term rating. The outlook is stable.

The rating affirmation reflects expectation that a “very high” likelihood of timely and sufficient extraordinary support from the government of India. “This support will help IOB withstand continuing weakness in operating performance,” said S&P’s credit analyst Amit Pandey.

IOB's aggressive growth over the past several years has stressed its internal control system. The bank's reported non-performing assets (NPAs) ratio rose sharply to 11 per cent in September 2015, from 7.35 per cent a year ago. This was the highest among Indian banks rated by S&P.

The bank's standard restructured ratio was also one of the highest, at 8.9 per cent. Most of this restructuring took place during the past few years and analysts expect slippages to continue to occur in the restructured loan book. The resultant high credit costs have strained IOB's earnings, which remain abysmally low.

The stressed assets comprise of Gross NPAs (11 per cent) plus standard restructured advances (8.9 per cent).

The Reserve Bank of India initiated a “prompt corrective action” on IOB on October 6, probably due to the bank's low earnings, which in turn are a result of its weak asset quality.