Moody's assigns Baa3 to Indian Overseas Bank

Stocks and Financial Services Press Releases Thursday April 7, 2011 15:29
Bangkok--7 Apr--Moody's Investors

Moody's Investors Service has assigned ratings to Indian Overseas Bank (IOB) for the first-time: standalone bank financial strength (BFSR) of D, which maps to a baseline credit assessment (BCA) of Ba2; global local currency (GLC) deposit of Baa3; and foreign currency long-term/short-term deposit of Ba1/Not Prime.

At the same time, Moody's has assigned the following foreign currency provisional (P) ratings to IOB's USD 1 billion Medium Term Note
Programme: long-term/short-term senior debt of (P)Baa3/(P)Prime-3; subordinated debt, or Lower Tier II debt of (P)Ba1; junior subordinated debt, or Upper Tier II of (P)Ba2; and Hybrid Tier 1 of (P)Ba3(hyb).
All the ratings carry stable outlooks.
The ratings consider IOB's modest franchise, moderate financial fundamentals, and public-sector bank status.

With a 2.4% share in system deposits, the bank is dominant in Tamil Nadu, the southern part of India, and, to a lesser extent, in the Northern and Western regions. It intends to develop its network to 3,000 domestic branches by 2013 and 3,000 ATMs by 2012 from 2,019 and 939, at December 2010. The greater national coverage will help the bank increase its declining proportion of low-cost current account savings accounts (CASA) deposits -- 31.0% at December 2010 - and grow government business.

IOB's important role in Tamil Nadu and its strong relationship with the government are apparent by the routing of payroll transactions by the state government and the Tamilnadu Electricity Board through the bank. In addition, IOB acts as a conduit for the funds transfers of various government support programs. Furthermore, it has exceeded the 40% government target in its lending to priority sectors. As of December 2010, priority sector loans accounted for 41.1% of its advances.

Financially, IOB is recovering from an operating downturn caused by the global financial crisis. Consequently, asset quality remains relatively weak compared to Indian bank peers, although significantly improved and manageable. As of December 2010, gross non-performing assets totalled

INR32,645 million, or 3.26% of advances. For the system, the ratio was 2.58% at September 2010. Bank management has targeted a gross non-performing assets ratio under 3.00% of advances as of March 2011.

Meanwhile, IOB's restructured assets of INR75,778 million, or 7.6% of advances were classified on a borrower, rather than facility basis; the latter classification would have resulted in a 26% reduction in restructured assets to 5.6% of gross loans. Nonetheless, this level is higher than the 5.25% of standard assets restructured by the industry during 2008-2010 under the Reserve Bank of India's special regulatory dispensation scheme. However, 96% of IOB's restructured assets are in the standard category.

On a positive note, IOB will comply with the regulatory provision coverage requirement of 70% by March 2011. Over the medium to longer term, the bank intends to raise its coverage to 75-80% as a countercyclical measure if profits permit.

Since the FY2010 year-end, IOB has resumed growing its loan at a rapid 20% pace. In order for IOB to maintain its stand-alone rating, the quality of this growth - as measured by asset quality ratios -- will have to be stronger than current credit quality and be sustained over an extended period. The bank noted that its lending limits are more conservative than those set by the Reserve Bank of India.

Like other Moody's rated Indian banks, IOB has high borrower concentration as measured against pre-provision profits and Tier 1 capital level.
As for capital, IOB's Tier 1 capital ratio will be over 8.0% after the capital injection from the government in March and with the inclusion of net profit for fiscal year 2011.

In determining IOB's stand-alone BFSR, Moody's assessed the bank's capital after incorporating expected losses in its risk assets using scenario analysis. This approach is consistent with Moody's "Calibrating Bank Ratings in the Context of the Global Financial Crisis" (February

2009) and the assumptions in "Stress Testing Indian Banks' Asset Quality"
(January 2009).

Under a stress scenario, which assumed a gross non-performing asset ratio of 12.62%, IOB would require INR55.0 billion, or USD1.2 billion, to replenish its Tier 1 capital ratio to 8%. To put this into perspective, IOB's ability to absorb losses in a stress situation is in line with the average for the rated PSBs.

Similar to other rated Indian banks, liquidity is not a major credit issue for IOB, although its relatively high loan to deposit ratio -- 80.1% at December 2010 and the highest level in 6 years -- suggests that management is running a tighter balance sheet. This situation is off-set by its substantial portfolio of liquid assets, which make up 18.8% of assets, and comprised primarily government securities.

Profitability is expected to revert to the bank's normal trend, which is average when compared to its peers. Earnings will be underpinned by lower credit costs from improving asset quality, the resumption of loan growth, and the better than industry provisioning percentage for pension liabilities.

These factors will be somewhat off-set by liquidity and competitive pressures on its net interest margin - which had widened in the first 9 months of FY2011 to 3.08% from 2.74% in FY10 - and also by pressures from its rapid branch expansion. Its overseas operations offer diversification, contributing to about 21% of profits as of December 2010.

Finally, the ratings also incorporate Moody's assessment that the probability of systemic support for IOB, if needed, is very high, and results in a two-notch lift in its GLC deposit rating of Baa3 from its standalone rating of Ba2. This view is predicated on IOB's close relationship with the government of India, via the latter's 65.87% holding, and as evidenced by repeated capital infusions into the bank.

The Programme allows for the issuance of various classes of securities, including senior, subordinated or Lower Tier II, junior subordinated or Upper Tier II and Hybrid Tier 1.

Therefore, individual notes issued under the Programme would be subject to a separate review of the terms and conditions set forth in the final prospectuses, supplements, or offering memorandums of the notes to be issued.

Furthermore, Moody's does not intend to assign the Programme rating to individual notes that are linked to the performance of another obligor (credit-linked notes), or to notes for which payment of principal or interest is variable and contractually dependent on the occurrence of a non-credit-linked event, or the performance of an index (non-credit-linked notes), except for notes whose principal and coupon payments are affected by standard sources of variation. See Moody's Special Comment "Moody's Update on Rating Debt Obligations with Variable Promises" published in June 2009.

The principal methodologies used in rating IOB were Bank Financial Strength Ratings: Global Methodology published in February 2007, Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology published in March 2007, Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated Debt published in November2009 and Frequently Asked Questions: Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated Debt published in November 2009.

IOB, headquartered in Chennai in India, had assets of INR2,251.9 billion as of December 31, 2010. It is the ninth largest public sector bank by assets in the country.

The following ratings were assigned and carry stable outlooks: standalone BFSR of D which maps to a BCA of Ba2; GLC deposit of Baa3; foreign currency long-term/short-term deposit of Ba1/Not Prime; foreign currency long-term/short-term senior debt of (P)Baa3/(P)Prime-3; foreign currency subordinated, or Lower Tier II debt of (P)Ba1; junior subordinated, or Upper Tier II debt of (P)Ba2; and Hybrid Tier 1 debt of (P)Ba3(hyb).

Information sources used to prepare the credit rating are the following:
parties involved in the ratings and public information.
Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it.

Please see the ratings disclosure page on our website for further information.
Please see the Credit Policy page on for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.
Beatrice Woo
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Singapore Pte. Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308
Hong Kong
Stephen Long
MD - Financial Institutions
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

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