Kolkata, Mar 7 (IBNS) CRISIL, a global analytical company, on Thursday said it has upgraded its rating on private sector unit Development Credit Bank Ltd's (DCB's) Lower Tier-II bonds to 'CRISIL A-/Stable' from 'CRISIL BBB+/Positive'; the rating on DCB's certificate of deposits programme has been upgraded to 'CRISIL A1+' from 'CRISIL A1'.
The upgrade reflects sustained improvement in DCB's asset quality over the past three years and its expected stabilisation at the current levels.
Slippages, which have remained stable at around 1.5 per cent in the past three years, are lower than the average for scheduled commercial banks, and on par with CRISIL-rated banks of a similar size, despite the stressed economic environment. CRISIL believes that DCB will maintain stable asset quality over the medium term, backed by its stringent underwriting and monitoring mechanism.
The rating upgrade also factors in significant improvement in DCB's earnings; further improvement is expected over the medium term, driven by increased operational efficiency. Improvement in asset quality has reduced credit costs, resulting in improved earnings.
The bank's return on average assets (RoA) improved to 1.0 per cent (annualised) during the nine months through December 2012 from 0.3 per cent during 2010-11 (refers to financial year, April 1 to March 31).
The ratings continue to reflect DCB's adequate capitalisation, and the expectation of continued support from the bank's promoter, the Aga Khan Fund for Economic Development (AKFED).
DCB has adequate capitalisation, as reflected in its comfortable capital adequacy ratio (CAR), high net worth coverage for net NPAs, and flexibility to raise capital. DCB's Tier-I and overall CAR were at 12.6 per cent and 13.7 per cent, respectively, as on December 31, 2012.
The management has a stated policy of maintaining Tier-I CAR at over 10.5 per cent. The bank's tangible net worth was at Rs.9.15 billion, with net worth coverage for net NPAs of 21.0 times as on December 31, 2012, up from Rs.6.04 billion and 13.6 times, respectively, as on December 31, 2011.
CRISIL said it believes that continued support from AKFED enhances DCB's flexibility to raise capital at regular intervals. For instance, with the support of AKFED, the bank raised Rs.1.93 billion and Rs.0.40 billion in March and December 2012 respectively.
Given DCB's demonstrated ability to raise funds from the market with the support of AKFED, and the bank's management's commitment to maintain Tier-I CAR at a minimum of 10.5 per cent, CRISIL believes that DCB will maintain adequate capitalisation over the medium term.
AKFED has stated that it will extend support to DCB as and when required. AKFED has, time and again, infused capital into DCB either directly or through associated entities or has facilitated in raising equity.
In addition, it could be liquidity support, wherein AKFED could subscribe to the debt instruments of DCB.
Although the regulatory requirement to reduce AKFED's stake in DCB to less than 10 per cent prevents AKFED from infusing fresh capital to fund the bank's growth, CRISIL said it believes that distress support will be available to DCB from AKFED if needed, and that the Reserve Bank of India will not object to support to DCB from AKFED in a distress situation.
These rating strengths are partially offset by DCB's susceptibility to asset quality risks on account of exposure to micro, small and medium enterprises (MSME) and SME sectors and relatively chunky exposures on the corporate sector. The rating is also constrained by the bank's average, but growing earnings profile and business franchise.
The asset quality of DCB is susceptible to risks on account of exposure to SME/MSME sector given the weaker credit risk profile of borrowers.
Further, the asset quality could be under stress on account of delinquencies in large corporate exposures, given the small size of the advances book.
CRISIL said it will continue to watch the performance of asset quality parameters closely, particularly in the SME/MSME and the corporate sector, especially in light of the currently weak economic and industrial outlook.
DCB has an average, but growing earnings profile, with a low net profitability margin of 0.45 per cent and return on assets of 1.0 per cent for the nine months ended December 31, 2012.
With credit costs declining, the earnings profile has shown improvement in past three years beginning 2010-11.
However, DCB's operating expenditure is high at 3.1 per cent of funds deployed, higher than the industry average by over 100 bps. CRISIL believes that DCB's profitability will improve over the medium term driven by the asset growth, and consequent improvement in operational efficiency.
DCB is one of the smallest scheduled commercial banks in the Indian banking industry.
As on December 31, 2012, it had a low asset base of Rs.95.9 billion, with only 89 branches as on date. DCB had a small market share of about 0.1 per cent in deposits and advances.
DCB's asset liability management (ALM) profile is stretched in buckets of less than a year. DCB is in the process of improving the ALM profile by increasing the average maturity period of retail term deposits to around 18 months from 12 months, to reduce mismatches, over the next few quarters.
However, in the meantime, lines of credit from banks and refinance facilities from institutions will help DCB service debt on time.
Nevertheless, DCB's liquidity remains a rating sensitivity factor, and CRISIL will continue to closely monitor the same.
CRISIL said it believes that DCB's capitalisation will remain adequate to meet its business growth and manage its asset-related risks. Its Tier-I CAR is expected to remain at over 10.5 per cent over the medium term.
The outlook may be revised to 'Positive' if the bank strengthens its market position significantly while maintaining healthy asset quality and earnings.
Conversely, the outlook may be revised to 'Negative' if DCB's asset quality or earnings deteriorate, or if AKFED revises its stance on support to DCB.