India Ratings & Research (Ind-Ra) has assigned IDBI Bank (IDBI) proposed Rs 25 billion additional tier I (AT1) perpetual debt instruments an 'AA-' rating. This will be the first issuance of AT1 debt capital by a bank following the updated guidelines by the Reserve Bank of India on Sept. 1, 2014.
The proposed AT1 perpetual debt instruments come with a 10-year call option and are subordinated to the claims of depositors, general creditors and subordinated debt of the bank. The bank can make coupon payments from its revenue reserves (not created for specific purposes) and from credit balance in the profit and loss account, subject to meeting minimum regulatory capital requirements at all times, including the capital buffer frameworks. The instruments are non-convertible, and come with a point of non-viability trigger for a permanent principal write-off (to be decided by Reserve Bank of India) and a minimum common equity tier-I (CET-1) trigger (5.5% till Mar. 31, 2019 and 6.125% thereafter) for a temporary write-down of principal.
The rating reflects the unsupported credit profile of the bank. This is in line with Ind-Ra's criteria for rating debt capital instruments with going-concern loss-absorption features. Ind-Ra recognises that government support may not be relied upon by the holders of these securities during a crisis as it could be prioritised for depositors. IDBI's standalone credit profile is weaker than that of other large government owned and private sector banks’. High credit costs and weak net interest margin have impacted the bank’s current profitability. IDBI's CET1 ratio at end-June 2014 was 7.85%, while RoA for FY14 was 0.38%.
Ind-Ra expects some near-term pressure on IDBI's profitability from its weak net interest margins and high credit costs. However, its focus on loan portfolio diversification (particularly towards priority sector loans) and increased push for retail liabilities are likely to boost its operating performance over the next five. Also, IDBI's relatively stronger provision coverage, cushion from strategic investments and lower cyclical stress offer some comfort on managing its profitability over this transition period.
Shares of the bank declined Rs 2.4, or 3.25%, to settle at Rs 71.45. The total volume of shares traded was 492,874 at the BSE (Tuesday).
