Crisil lowers rating outlook for three banks

Rating agency Crisil has lowered the outlook for three public sector banks — Canara Bank, Corporation Bank and IDBI Bank - from stable to negative, saying that their resource profile has weakened further. This has been attributed to a substantial rise in borrowing costs and a decline in current and savings account (CASA) deposits. The ratings have, however, been reaffirmed.

It said that the banks are increasingly relying on high-cost bulk deposits to fund their asset growth.

In a statement last week, the agency had said that Corporation Bank’s resource profile had weakened further in 2007-08.

“The proportion of Corporation Bank’s low-cost current and savings account deposits to its total deposits is shrinking. The bank has increasingly relied on high-cost bulk deposits to fund its asset growth. As a result, its interest spreads have declined sharply compared with that of its peers.
 

KEEPING TABS
Bank	Instrument	Earlier rating/ outlook	Revised rating/  outlook
Corporation Bank	Tier-II bonds	AAA/ stable	AAA/ negative
Canara Bank	Long-term debt	AAA/ stable	AAA/ negative
IDBI Bank	Omni bonds	AA+/ stable	AA+/ negative
	Lower tier-II bonds	AA+/ stable	AA+/ negative
	Flexi bonds	AA+/ stable	AA+/ negative
	Certificate of deposit	AA+/ stable	AA+/ negative
Note: Rating and outlook for other instruments has been reaffirmed (Source: Crisil)

 

Moreover, a moderate contribution from fee income further weakens the bank’s overall earnings profile. Crisil believes that Corporation Bank’s resource and earnings profile will remain moderate over the medium term, given the increasing strain on its interest spreads, and low revenue diversification,” said a release.

In case of Canara Bank, Crisil pointed out that its cost of deposits was the highest among its peer public-sector banks.

“The bank has sought to control its borrowing costs and increase its yield and CASA levels during the first half of 2008-09. However, the sustainability of these measures remains to be seen, against the backdrop of rising interest rates,” the statement said.

A statement on IDBI Bank said the revision in the outlook reflected the pressure on the bank’s earnings profile and its capitalisation levels in a scenario where the operating environment for the banking sector is expected to continue to be challenging.

As a result, it said the tier-I capital adequacy ratio, though currently adequate, is declining. In addition, the bank has limited ability to raise fresh capital given that the Centre holds 52.68 per cent, compared with the restriction on reduction of government equity below 51 per cent.

“While the bank is in discussions with the Government of India to convert part of its tier-I government bonds into equity, the certainty and timing of the same in yet to be determined. If converted, this would have a positive effect on IDBI’s capitalisation levels. Moreover, it will enhance the bank’s ability to raise further capital,” the statement said.

Further, it pointed out that IDBI Bank has large exposure to project finance, which have seen high levels of delinquency in the past.