Moody's has also affirmed IDBI and its DIFC branch's long-term foreign currency senior unsecured debt rating at B1 and changed the outlook to positive.
Moody's has also affirmed the bank's baseline credit assessment (BCA) at caa1 and the counterparty risk assessment (CRA) at Ba3(cr)/NP(cr).
In addition, Moody's has changed the outlook on IDBI and its DIFC branch to positive from stable.
The list of affected ratings is provided at the end of this press release.
RATINGS RATIONALE
UPWARD PRESSURE ON THE BANK'S BCA
The positive outlook reflects the upward pressure that could develop on the bank's long-term rating, if its credit fundamentals -- namely the capital position -- continues to improve over the next 12-18 months due to capital infusions from the Indian government (Baa2 stable).
The positive outlook also factors in Moody's view on the expected evolution of IDBI's balance sheet, including a stabilization in asset quality and continued stable funding and liquidity positions.
According to the recapitalization plan announced in October 2017, the government has committed to infuse INR1.53 trillion into the public-sector banks by March 2019, of which INR800 billion will be injected in the form of recapitalization bonds.
Based on the announced allocations of this capital to individual banks, IDBI will receive INR78.81 billion in new capital by March 2018. Moody's estimates that this capital infusion will increase the common equity tier 1 (CET1) ratio for IDBI to about 9.8% based on the risk weighted assets as of 31 December 2017. At the same time, the bank will continue to report losses over the next few quarters on account of high provisioning charges, eroding this capital level. Nevertheless, Moody's expects that the CET1 ratio as of 31 March 2019 will meet the minimum Basel III capital requirements.
As of the latest quarter ended 31 December 2017, IDBI's gross NPA ratio declined to 24.7% from the high of 25.0% in the quarter ended 30 September 2017. In addition, the net NPA ratio stabilized at 14.3% compared again with the previous quarter.
The bank has also been able to maintain a stable funding base in spite of its weak solvency profile. Thus, the bank reported a current and savings account (CASA) balance of INR856 billion as of 31 December 2017, which was a moderate increase from INR846 billion the year before. With the bank shedding some of its expensive bulk deposits in the past year, the CASA ratio improved significantly to 36.1% of deposits at of 31 December 2017 compared to 28.4% reported as of 31 December 2016. This improvement in the bank's funding mix is also a positive driver for the bank's profitability.
IMPACT ON LONG-TERM RATINGS
Moody's continues to assume a very high probability of government support for IDBI, resulting in a three-notch uplift to the deposit rating from the BCA.
The positive outlook on IDBI's deposit rating reflects a likely rating upgrade if the standalone BCA moves up over the next 12-18 months.
WHAT COULD CHANGE THE RATING UP:
Given the positive outlook, IDBI's ratings could be upgraded in the next 12-18 months, if the capital infusion helps strengthen the bank's capital to a level above minimum regulatory requirements (including the capital conservation buffer) under Basel III standards, and/or the bank returns to profitability on a sustainable basis.
WHAT COULD CHANGE THE RATING DOWN:
Downward pressure on IDBI's ratings will emerge if further credit losses worsen its capital position. Any indication that government support has diminished beyond what Moody's anticipates in this rating action could also lead to a ratings downgrade.
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