Fitch downgrades IndusInd over capital infusion delay

Fitch Ratings today downgraded the outlook on IndusInd Bank to negative from stable on concerns over the bank's inability to infuse equity capital despite its adequacy ratio being just above the regulatory minimum.

"IndusInd Bank had issued Tier II capital, and temporarily offloaded some loans from its balance sheet to shore up its capital adequacy ratio (CAR). An equity infusion is important to support IndusInd Bank's long-term improvement in performance," the rating agency said.

The bank's equity to assets ratio of 4.5 per cent at the end of June 2006, down from 4.9 per cent in March 2006, is the lowest in the among Indian banks rated by Fitch.

The bank's CAR had fallen to 9.8 per cent at the end of June 2006 from 10.5 per cent as on March 31, 2006. At the current level, the bank's CAR is barely above the minimum 9 per cent prescribed by the Reserve Bank of India (RBI).

The CAR had been affected by the deduction of credit enhancements for securitisation transactions in the financial year ending March 2006.

IndusInd Bank plans to raise equity from strategic investors, although the timing of the issue and the quantum of infusion has yet to be announced.

The bank's ratings could come under downward pressure if its plans to raise equity do not materialise ahead of the proposed capital charge for operational risk under the Basel II guidelines likely to made effective from March 31, 2007.

An improvement in its capitalisation could result in the ratings outlook being revised to stable, Fitch said. Fitch also noted that the bank's operating performance was weak in 2005-06 and in the first quarter of 2006-07.

The bank's net interest margin, which stood at 2 per cent in 2005-06 compared to 2.9 per cent in 2004-05, came under pressure due to intense competition in the commercial vehicle financing business (30 per cent of the bank's loan portfolio), the rising cost of funds and the elimination of upfront profits on sale of securitised assets.

Although yields on incremental loans have improved over the past quarter in line with systemic trends, a repricing of the entire loan portfolio would only take place over 18 to 24 months.

By that time, the bank's investments in expanding its branches is also expected to translate into an improvement in its low-cost deposit base (currently 13 per cent of total deposits) and result in higher margins.

The fundamentals of IndusInd Bank's long-term improvement were put in place following the write-off of the legacy of corporate non-performing loans (NPL) and the addition of the more profitable retail business to the bank's portfolio with the merger with Ashok Leyland Finance in 2003-04.