India Ratings & Research (Ind-Ra) has affirmed Allahabad Bank's (AllB) long-term issuer rating at 'AA'. The outlook is stable.
Ind-Ra has also affirmed the 'AA unsolicited' rating on the bank's Rs 5 billion lower tier II 10 year subordinated debt.
The affirmations are driven by Ind-Ra's expectation of continued support to AllB from its ultimate owner Government of India (GOI) (58.9% share), given its position as the 14th largest government bank in India. AllB benefits from a strong regional franchise in the northern and eastern parts of country with increasing pan-India coverage. While the bank's asset quality is under cyclical stress and the funding gap has worsened, profitability and margins have been maintained.
Ind-Ra believes that the future operating performance and overall credit profile for AllB will be commensurate with 'AA' rated banks.
AllB's gross non-performing asset (NPA) ratio rose to 5.73% in FYE14 from 3.92% in FYE13. AllB's loan portfolio has been under stress since FY11 on account of increase in delinquencies in agriculture, service and retail sector. Additionally, its higher exposure to the infrastructure and cyclical sectors has resulted in a spike in restructured assets. Restructured loans stood at 7.74% of total advances in FYE14.
Ind-Ra expects the bank's asset quality to remain under pressure, even though the expected cyclical uptick in macro-economy will ease some of the pressures from sectors such as iron and steel as well as textiles.
In spite of asset quality pressures, AllB's net interest margin (NIM) remained healthy on account of higher yields on its loan book (oriented to mid/small corporates) coupled with reasonable deposit costs on account of its funding profile.
However, margins could come under pressure as the bank's one-year cumulative funding gap has worsened to 31.5% in FYE14 (FYE13: 11%) and AllB may need to rely on volatile high-cost bulk deposits and certificate of deposits for refinancing. AllB should consider taking advantage of the recent union budget announcement and raise long-term infrastructure funds with minimum regulatory pre-emptions, it said.
