More trouble for IDBI Bank as Icra downgrades its bond rating
- Opening bell: Asian markets rise; TeamLease, Jaiprakash Power, Mahindra Finance in news
- Kansai Nerolac: overhang of higher input costs remains in Q2
- How India stacks up against peers on fiscal parameters
- Bajaj Finance: milking the consumption story yet again
- Colgate-Palmolive: weaker-than-expected recovery in wholesale trade
Mumbai: IDBI Bank Ltd’s list of troubles just grew longer. On Tuesday, rating company Icra Ltd downgraded the lender’s outstanding debt worth Rs25,924 crore, including the so-called additional tier-1 (AT-1) bonds, citing its weak capital position.
Crisil was the first rating agency to downgrade the bank’s bonds earlier this month.
For AT-1 bonds, also known as perpetual bonds, the issuing bank has the prerogative to skip coupon payments in case they don’t have enough profits or have enough distributable reserves. Icra has cut the rating for nearly Rs2,500 crore of IDBI’s AT-1 bonds to BBB-, its lowest for such instruments, indicating that they are at risk of default.
In a statement, Icra noted that the bank’s core equity capital ratio, or CET1, stood at 5.64% at the end of March. This was lower than the minimum regulatory limit of 6.75% which includes core equity capital and capital conservation buffer (CCB). CET1 is a measure of a bank’s solvency that gauges its capital strength.
If the capital level falls further and breaches the trigger point of 5.5%, IDBI can skip coupon payments on these bonds or write down or convert these instruments into equity.
“As per the terms of the AT-I instruments, the bank will be constrained from servicing the coupon on these bonds, unless it reports profits and improves its CET1 levels (including CCB) above regulatory levels by divestments of non-core assets and raising fresh capital before the coupon payment dates,” the Icra statement said.
IDBI will seek further capital infusion from the government to ensure that it does not fall below the trigger point of 5.5%, said a senior official with the lender on condition of anonymity.
“We are working on the plan and adequate capital will be raised before the scheduled coupon payment,” this person said without going into details.
The first AT-1 bond interest payment is due in August.
The government is unlikely to allow IDBI Bank to default on its interest payments, said Hemindra Hazari, an independent banking analyst. “A default by IDBI is equivalent to sovereign default,” he said.
Icra estimates that the bank will require an equity infusion of Rs9,500-12,000 crore over the current financial year and the next. That is a tough task, considering this amount is 70-90% of IDBI’s market capitalization of Rs13,455 crore at Tuesday’s closing prices.
Raising capital internally (from operations) is also not easy.
“Icra believes that the asset quality pressures are likely to remain high during FY2018. With low provision cover and high net NPAs (non-performing assets) and an expectation of further weakening in asset quality, the bank’s internal capital generation will remain weak over the medium term,” the rater’s statement said.
The ratings cut comes on the heels of the central bank initiating its prompt corrective action (PCA) on 9 May. Under PCA, which is triggered when banks fail to meet capital ratios, asset quality and profitability yardsticks, RBI has put restrictions on the bank’s business activities such as lending and branch expansion. The bank will also have to take other corrective actions such as raising capital levels, restricting dividend payment and curtailing management compensation.
However, even before IDBI was put on the watchlist, the bank had clamped down on lending and branch expansion following a loss in the third quarter.
Subsequently on 21 February, it got board approval to sell some of its so-called non-core assets valued at Rs6,500 crore.
On 21 March, the bank received board approval to raise Rs2,500 crore of equity capital through preferential allotment to government and financial institutions such as insurance companies in FY18. This came after the government infused Rs1,900 crore of equity capital in the bank under its Indradhanush programme.
The government also swapped IDBI’s former chairman and managing director Kishore Kharat with his counterpart in Indian Bank, M.K. Jain.
IDBI’s troubles began after the Reserve Bank of India’s asset quality review in late 2015, when all lenders were mandated to recognize stressed assets and set aside enough funds to cover bad loans. In the year ended 31 March, IDBI Bank’s loss widened to Rs5,158 crore from Rs 3,665 crore losses in the previous year.
As a percentage of total assets, gross non-performing assets soared to 21.25% at the end of the March quarter from 10.98% a year ago. Net NPAs stood at 13.21%, compared with 9.61% in the year-ago quarter.
Shares of IDBI have lost 5.84% in the year to date, while the benchmark Sensex has gained 14.04% and the banking index 23.04%.
To be sure, IDBI is not the only state-owned bank facing bad loan problems. Such banks accounted for 89% of the Indian banking industry’s Rs7.7 trillion gross bad loans at the end of March. If anything, peers such as Uco Bank and Indian Overseas Bank have equally worse gross bad loan ratios of over 20%.
IDBI’s troubles have been compounded by a Central Bureau of Investigation arrest of its former chairman Yogesh Aggarwal and other officials over a loan granted to the now defunct Kingfisher Airlines Ltd.