Vijaya Bank Downgraded to 'Fitch AA-(ind)'/Stable
May 30, 2012‐ Mumbai/Singapore
Fitch Ratings has downgraded India-based Vijaya Bank's (Vijaya) National Long-Term (LT) rating to 'Fitch AA-(ind)' from 'Fitch AA(ind)'. The Outlook is Stable. The agency has also downgraded Vijaya's INR9bn lower tier 2 subordinated debt to 'Fitch AA-(ind)' from 'Fitch AA(ind)' and its INR6bn upper tier 2 subordinated debt to 'Fitch A-(ind)' from 'Fitch AA-(ind)'.
The downgrade reflects continued deterioration in Vijaya's funding profile, which is weak compared with most Indian government banks. The ratings also reflect Fitch's expectations of continued weakening in the bank's asset quality and moderate capitalisation.
The National Long term rating reflects Fitch's view of continued financial support from the government of India (GoI), given GoI's 55% ownership and the bank's regional stature. The government injected INR12bn in the form of perpetual non-cumulative preference shares and INR3.7bn in the form of equity into Vijaya in FY11. In March 2012, the bank received INR1.5bn indirectly as equity through Life Insurance Corporation of India (India's largest insurance company, 100% owned by the government).
The bank's hybrid debt rating (upper tier 2) does not factor in government support and is notched down twice from its unsupported rating, which is viewed at a notch below the National LT rating. The downgrade, therefore, reflects Vijaya's weakened stand-alone credit profile.
Vijaya's funding is weak and continues to deteriorate. The bank's institutional funding (deposits greater than INR100m) as a proportion of total deposits (44% in FY12, 34% in Q3FY11) is among the highest in public sector banks (PSBs). While Vijaya's status as a government bank mitigates refinancing risk, its weak funding adds volatility to funding costs, especially during tight liquidity conditions and hence impacts profitability. While the rise in institutional funding is a system-wide phenomenon, Vijaya is more susceptible given its large asset-liability tenure mismatches and its modest profitability (ROA: 0.7% in FY12).
Fitch notes that Vijaya's proportion of stressed assets rose sharply in FY12 to 8% from 5% in FY11, with non-performing loans (NPLs) increasing to 2.93% (FY11: 2.56%) and 2.6% of loans were restructured during the year. The proportion of stressed assets may rise further in view of Vijay's high exposures to troubled sectors such as power generation, electricity distribution companies, roads and ports, commercial real estate and iron & steel. The agency also notes that the bank's provision coverage on NPLs (FY12: 41.9%) is low and inadequate to absorb increased losses, especially when its restructured assets attract only 2% provisioning.
Though Vijaya's reported capitalisation (Tier 1: 9.7% in FY12) compares well with its peers, this is viewed by Fitch as not particularly strong considering its deteriorated asset quality and high net NPLs/equity (FY12: 26%).
The bank's National LT rating is at the Support Rating Floor for government banks. Changes in Fitch's view of government support may lead to changes in the National LT rating. The bank's hybrid debt ratings could come under further pressure if there is substantially higher-than-expected deterioration in asset quality and/or a sharp decline in profitability.
Vijaya is a medium-sized PSB, headquartered in the state of Karnataka. As at end-FY12, the bank has had 1,300 branches, of which around 63% are located in southern India.
Primary Analyst, Prakash Agarwal, Associate Director, +91 22 4000 1753
Fitch Ratings India Pvt Ltd, Apeejay House, 6th floor, 3 Dinshaw Vachha Road, Churchgate, Mumbai 400020, India
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