Rationale
The change in the
outlook on the long-term rating to Stable factors in the improvement in Indian
Overseas Bank's (IOB) solvency position, which is likely to sustain over the
medium term in ICRA's view. ICRA expects that the bank is likely to absorb the
asset quality stress through its operating profits, thereby protecting its
capital position. On a proforma basis and including the slippages in the
absence of a standstill2 on asset classification as non-performing, the net
non-performing advances (NNPA) ratio stood at ~4.0% as on December 31, 2020,
and IOB's solvency position improved to ~53% as on December 31, 2020 from ~176%
as on December 31, 2019. The ratings continue to be supported by IOB's
sovereign ownership and the demonstrated track record of capital support
received by the bank. The Government of India (GoI) infused equity capital of
~Rs. 19,974 crore into the bank during FY2018- 2020. Along with this, the
bank's deposit base remains stable with the improving share of core deposits
supported by a wellestablished deposit franchise, which, in turn, drives its
strong liquidity profile. The ratings, however, remain constrained by the weak
asset quality as reflected by the high overdue loan book level, which is
expected to lead to elevated credit provisions and weak internal capital
generation. The bank continues to operate under the prompt corrective action
(PCA) framework of the Reserve Bank of India (RBI). This, coupled with limited
capital buffers over regulatory levels, constrains its ability to purse credit
growth. ICRA, however, expects the incremental credit losses to be absorbed
through operating profits, thereby keeping the NNPAs below the PCA threshold.
Though the GoI has not announced any capital infusion for IOB in FY2021 till
now, ICRA expects the bank to maintain the regulatory capital position. It
would nevertheless require growth capital, given ICRA's expectation of weak
internal capital generation. As per ICRA's estimate, IOB will require Rs.
1,000-1,200 crore of capital to achieve a nominal credit growth of 2-3% with
the Tier I capital position maintained at a minimum of 9.5% of risk-weighted
assets (RWAs). ICRA has withdrawn the ratings assigned to the Rs. 1,000-crore
Basel II Lower Tier II Bonds and the Rs. 967-crore Basel II Upper Tier II bonds
as these bonds are fully redeemed and no amount is outstanding against the
rated instruments. The ratings were withdrawn in accordance with ICRA's policy
on withdrawal and suspension
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