International rating agency Moody's Investors Service on Wednesday upgraded the IDBI Bank long term rating by three notches on improved solvency of the bank following a significant capital infusion from its new promoter Life Insurance Corporation of India (LIC). The agency also said that the outlook for the Bank has been changed to ‘positive’ from ‘ratings under review’ assigned earlier.
The upgrade reflects the improved solvency of the bank following the completion of a significant capital infusion. On January 21, 2019,IDBI received Rs 5030 crore from the allotment of new shares to the Life Insurance Corporation of India (LIC, unrated). This follows the receipt of Rs 14500 crore in capital from the previous tranche on December 28, 2018, Moody’s said in a press statement.
”We estimate that as a result, IDBI's common equity tier I (CET1 ratio) will increase by 10 percentage points, based on the bank's risk weighted assets as of September 30, 2018. The capital infusion will enable to bank to increase provisions for bad loans, which when combined with stabilizing asset quality, will result in lower credit costs and improve profitability in 2020,” said the rating agency.
The bank’s ‘Baseline Credit Assessment (BCA)‘ has been upgraded to ‘b2 from caa1’. Moody's Investors Service upgraded the long term foreign currency senior unsecured rating of IDBI Bank and its Dubai International Financial Centre (DIFC) Branch to Ba2 from B1. The long term local and foreign currency bank deposit ratings of IDBI was also upgraded to Ba2 from B1. The senior unsecured MTN, Subordinate MTN, and Junior Subordinate MTN rating of IDBI and its DIFC branch are upgraded to (P)Ba2 from (P)B1, (P)B2 from (P)Caa1, and (P)B3 from (P)Caa2 respectively.
IDBI's gross and net non-performing loan (NPL ratio) is the highest among banks. The bank's gross and net NPL ratio was 31.8 per cent and 17.3 per cent respectively as of September 30, 2018.
“Given the high amount of NPL recognition already done, we expect the NPL formation rate to significantly decline. If some of the capital received is used to increase provision coverage, profitability can improve significantly as a result of lower future credit costs. The positive outlook factors in this scenario,” said the rating agency.
“The Ba2 deposit rating includes three notches of uplift for government support, and we maintain our government support assumptions as very high.”
”We believe that government support remains very high even though direct government ownership has declined. We expect that support will flow through LIC. LIC is 100 per cent owned by the Government of India, and therefore the ultimate support provider to IDBI remains the Government of India. This results in three notches of uplift to the adjusted BCA in arriving at the deposit rating of Ba2,” said the agency.
IDBI Bank has reported total assets of Rs 3.3 lakh crore at September 30, 2018.