Moody's cuts IOB financial strength rating on higher bad loans

International rating agency Moody's Investors Service has lowered Indian Overseas Bank's baseline credit assessment (BCA) by two notches following a rise in bad assets of the state-run lender.
It, however, affirmed the senior unsecured and local currency deposit ratings of IOB at Baa3 on a high likelihood that the government will support the lender.
"Moody's has lowered IOB's bank financial strength rating (BFSR) to E+ from D-, which is equivalent to a baseline credit assessment (BCA)of b2, two notches lower than the previous BCA," the rating agency said in a note today.
The Chennai-headquartered bank reported a sharp increase in gross non performing assets at 7.35 per cent for September quarter as against 5.84 per cent in the year-ago period.

The bank also showed an increase in the restructured assets at 7.85 per cent, it said.
Moody's warned that IOB's reserves and capital provide a narrow buffer against potential losses and added the bank's core tier-I capital has slipped to 7.3 per cent in September as against 7.4 per cent in the year ago period.

However, there shall be some improvement in the ratio with the government's capital support which is expected before March 2015, it said.
Moody's said the lender will continue to post a fall in profits as it did in the September quarter on falling net interest margins and elevated provisioning expenses.

It said a sustained recovery in asset quality, with NPAs and restructured loans each below 5 per cent without a significant decrease in coverage ratios, may result in an upward revision of the rating.
However, if the same increase to over 7.5 per cent each, the rating may go down as well, Moody's warned.