Fitch upgrades Vijaya Bank

Rating agency Fitch has upgraded Vijaya Bank's individual rating to C/D from D. This means the Bangalore-based public sector bank has improved its financial health on a standalone basis.

The bank plans to raise tier II capital of Rs 500 crore "" subordinated debt of tier II (Rs 200 crore) and upper tier II ( Rs 300 crore) "" to shore up its capital adequacy and credit growth. It may hit the market before end of March 2007. Fitch has assigned AA+ and AA rating to the subordinated bond and upper tier II bond, respectively.

The upgrade reflects improved solvency ratios. It has also reduced non-performing loans (NPLs) ratios through focus on recovery, accelerated write-offs. The higher loan loss provisioning reserves (73.6 per cent of gross NPLs in FY06 against 60 per cent for industry) has also helped to boost financial profile, Fitch said.

However, there has been incremental addition to NPLs, especially in the retail business. While it is improving risk management systems to arrest the trend, it still lags stronger government and private banks on this count, the agency said.

Net interest margins were declining over the last two years owing to lower investment yields and increased borrowing costs. This trend reversed by December 2007 through lower market risk on the investment portfolio, repricing of loans and focus on high yielding loan retail and SME loans.

The increasing share of retail and SME loans is likely to help to sustain margins at current median levels. But, it may not attain pre-FY05 margins due to intense competition and The lesser share of low-cost deposits.

At present its low-cost deposits - current and savings - base is about 32 per cent lower compared with other public and private banks. It wants to raise to 35 per cent by March, bank official said.