Moody's Investors Service upgrades 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 have been also upgraded to Ba2 from B1.
IDBI Bank's Baseline Credit Assessment (BCA) has been upgraded to b2 from caa1. At the same time, the adjusted BCA is upgraded to b2 from caa1.
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.
Moody's also upgraded the long term Counterparty Risk Assessment and local currency long term Counterparty Risk Rating to Ba1(cr) and Ba1 respectively, from Ba3(cr) and Ba3 respectively. Moody's also assigned a long and short term foreign currency Counterparty Risk Rating of Ba1/Not Prime to IDBI and its DIFC branch.
The outlook, where applicable, has been changed to positive from ratings under review.
These rating actions conclude the review for upgrade initiated on July 25, 2018.
The upgrade reflects the improved solvency of the bank following the completion of a significant capital infusion. On January 21, 2019, IDBI received Rs5,030cr from the allotment of new shares to the Life Insurance Corporation of India (LIC, unrated). This follows the receipt of Rs14500cr in capital from the previous tranche on December 28, 2018.
We estimate that as a result, IDBI's CET1 ratio will increase by 10% 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.
IDBI's gross and net NPL ratio is the highest among our rated banks. The bank's gross and net NPL ratio was 31.8% and 17.3% respectively as of September 30, 2018. Nevertheless, asset quality deterioration measured by net NPL formation has slowed, but remains high, especially when compared to public sector bank peers. Going forward, we expect the net NPL formation rate to further improve, and IDBI to lower its stock of NPLs by increasing write-offs.
IDBI's funding and liquidity has remained robust even though its asset quality has been impaired. The bank's CASA ratio has improved as bulk deposits have run-off, resulting in a higher percentage of current and savings account deposits to total deposits.
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% 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.