Canara, Corporation, IDBI Bank turns negative in rating outlook
By Ankit Sharma
Oct 8, 2008
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Public sector banks - Canara Bank, Corporation Bank and IDBI Bank - have been rated down form stable to negative by a rating agency, Crisil. The rating agency mentions that resource profile of these banks has weakened further.

The borrowing costs of banks have been rising along with a fall in current and savings account (CASA) deposits. Banks are increasingly relying on high-cost bulk deposits to fund their asset growth. All these are concerns that have been considered while revising the rating outlook of the banks.

Corporation Bank's resource profile had weakened further in 2007-08 and Crisil has revised the bank's outlook on the tier-II bonds.

A release said, "The proportion of Corporation Bank's low-cost current and savings account deposits to its total deposits is shrinking. The bank has increasingly relied on high-cost bulk deposits to fund its asset growth. As a result, its interest spreads have declined sharply compared with that of its peers. Moreover, a moderate contribution from fee income further weakens the bank's overall earnings profile. Crisil believes that Corporation Bank's resource and earnings profile will remain moderate over the medium term, given the increasing strain on its interest spreads, and low revenue diversification."

For Canara Bank, the agency pointed that cost of deposits of the bank was the highest among its peer public-sector banks. The resource profile has deteriorated, resulting in low-cost deposits being less-than-industry-average.

"The bank has sought to control its borrowing costs and increase its yield and CASA levels during the first half of 2008-09. However, the sustainability of these measures remains to be seen, against the backdrop of rising interest rates," the statement said.

The agency statement on IDBI Bank said "earnings profile remains weak, given its relatively high cost of borrowing because of below-average current and saving account (CASA) deposits and significant reliance on bulk deposits."

The bank's tier-I capital adequacy ratio, though currently adequate, is declining. Further, the bank has limited flexibility to raise additional capital, as the government stake is at 52.68%, just above the floor level of 51%.

"While the bank is in discussions with the Government of India to convert part of its tier-I government bonds into equity, the certainty and timing of the same is yet to be determined. If converted, this would have a positive effect on IDBI's capitalisation levels. Moreover, it will enhance the bank's ability to raise further capital," the statement said.

The agency has revised the bank's outlook on Omni bonds, Lower tier-II bonds, Flexi bonds and Certificate of deposit. All these instruments have been rated down from AA+/ stable to AA+/ negative.

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