IDBI’s high exposure to stressed corporate loans, coupled with its already weak profitability, is increasing the bank’s asset quality vulnerability, according to Moody’s Investors Service.

“The negative outlook on IDBI’s standalone bank financial strength rating reflects our view of the potential for further deterioration in the asset quality of the bank’s corporate loans,’’ says Srikanth Vadlamani, a Moody’s Assistant Vice-President and Senior Analyst.

Moody’s has put together a new credit focus report entitled ‘High Corporate Exposure Creates Asset Quality Vulnerability for IDBI, looks into the key factors that characterise IDBI’s credit profile, including the emerging asset quality trends that led to the change in outlook to negative from stable on March 6, 2014.

“IDBI’s asset quality is now roughly in line with that of its peers, having deteriorated more quickly in 2013 because of stress in big-ticket corporate loans,’’ says Vadlamani.

Impaired loans, non-performing loans

At end-2013, IDBI’s impaired loans amounted to 85 per cent of its shareholders’ equity and loan-loss reserves, at the lowest end of the 85 per cent to 130 per cent range, for similarly rated Indian public sector banks in India, said Moody’s.

In the nine-month period ended December 2013, IDBI’s gross non-performing loans rose 55 per cent and its restructured loans rose 5 per cent, compared with average increases of 35 per cent and 9 per cent, respectively, for other rated public sector banks, it added.

The report cites high corporate exposure and low profitability as structural weaknesses for IDBI.

Owing to IDBI’s history as a development finance institution focused on term loans to corporate borrowers, the bank has one of the highest exposures to large corporate loans among Indian public sector banks.

Moody’s said IDBI’s profitability is also amongst the lowest of public-sector banks on account of its weak funding franchise. Hence, its ability to absorb higher credit costs is relatively limited.

Standalone financial strength

The bank’s standalone bank financial strength rating has been maintained at “D-’’, reflecting Moody’s view that its baseline credit assessment (BCA) of ba3 is appropriately positioned. The BCA of ba3 incorporates the structural weakness at IDBI, and only one rated public-sector bank has a lower BCA.

The stable outlook on the bank’s Baa3 debt and deposit ratings reflects Moody's ongoing assumption of a high probability of government support.