Mumbai (Maharashtra) [India], Aug 22 (ANI): India Ratings and Research (Ind-Ra) has downgraded South Indian Bank's long-term issuer rating to A from A-plus with a negative outlook.
The downgrade reflects bank's challenges on asset side which have been aggravated by prevailing uncertainty in the environment because of Covid-19-led disruptions, weak capital buffers and subdued operating performance.
The Thrissur-based private sector lender's net stressed assets to net worth stood at 65.7 per cent in Q1 FY21.
Ind-Ra said the bank's performance is likely to remain under pressure in the medium term with provision coverage needing to be ramped up for the stressed assets and incremental credit costs resulting from likely slippages from the book under moratorium, keeping internal accruals subdued and affecting capital buffers.
It has maintained a negative in view of continued challenges in terms of raising substantial equity, considering the weak operating performance and modest valuations.
The ratings also factor in the bank's sizeable franchise in southern states, especially in Kerala, the stable liability profile and diversified loan mix with an increasing focus towards granular exposures.
For AT1 bonds, Ind-Ra considers the discretionary component, the coupon omission risk and the write-down or conversion risk as key parameters to arrive at the ratings.
The agency said it recognises unique going-concern loss-absorption feature of these bonds that differentiates them from the bank's senior debt, factoring in a higher probability of an ultimate loss for the investors.
The AT1 bonds' rating reflects the bank's deteriorated standalone credit profile along with its ability to service coupons and its equity requirement to avoid write-down triggers.
At FYE20, South Indian Bank's distributable reserves accounted for 2.4 per cent of the risk weighted assets which in Ind-Ra's view will be reasonable to cover coupon servicing.
However, the impact of Covid-19-related challenges and slippages in the moratorium book will add to the bank's stressed assets with the building of provision coverage impacting internal accruals, which Ind-Ra said will adversely affect capital buffers. (ANI)