Moody's downgrades ICICI Bank UK's deposits

Global rating agency Moody’s has downgraded the supported long-term bank deposits and senior unsecured debt of ICICI Bank UK, the UK subsidiary of ICICI Bank, from Baa1 to Baa2.

It also revised the rating for the subordinated debt to Baa3 from Baa2 and junior subordinated debt to Ba2 from Ba1. It, however, affirmed the ‘D’ bank financial strength rating and the Prime-2 short-term ratings. The outlook on all ratings is stable.

Three weeks ago, Moody’s and Standard & Poor’s (S&P) had said ICICI Bank’s overseas arms have no significant subprime risks. “ICICI Bank’s UK subsidiary has no high-risk, subprime securities and enjoys robust asset quality and liquidity,” Moody’s had said. Another agency S&P, had pointed out “credit fundamentals of ICICI Bank continue to remain sound despite the reports on its exposure to Lehman Brothers or the Bakerie group”.

 

The downgrade of ICICI Bank UK’s long-term debt and deposits is a function of Moody’s change in the parent (ICICI Bank) bank’s baseline credit assessment to Baa2, which is the highest BCA level assigned to Indian banks.

Moody’s said the rating ‘D’ incorporated a certain degree of volatility in earnings, which could potentially arise from the bank’s large securities holdings. Specifically, in September 2008, the bank announced exposures of $80 million to the Lehman Brothers Holdings group, with likely write-down implications, partly provided in September 2008 financial results.

This, combined with additional mark-to-market write-downs on the bank’s investment book and write-offs on the trading book, could depress profitability for this financial year and impact negatively available-for-sale reserves. “In this respect, we, however, note that the bank’s investment policy has been rather conservative and that the mark-to-market impact is a function of market volatility rather than structured or high-risk, subprime-related securities.”

Furthermore, Moody’s takes comfort from the fact that the parent bank, as demonstrated earlier this year, has been proactive in supporting its largest overseas subsidiary by injecting an additional $100 million of tier-I equity to mitigate potential losses and maintain ICICI Bank UK’s current capitalisation level. Moody’s believes that the parent also has additional flexibility for future injections, if needed.

The rating action reflects ICICI Bank UK’s high integration and dependency on the group, evidenced by the recent capital injections, as well as its strategic importance.