Fitch confirms ratings of three Kerala based private banks

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Kochi: Fitch Ratings has affirmed the National Long-Term ratings of three Kerala-Based private sector banks. Federal Bank Limited (FBL) has been affirmed at ‘Fitch AA-(ind)’, South Indian Bank (SIB) at ‘Fitch A+(ind)’, and Dhanlaxmi Bank (Dhanlaxmi) at ‘Fitch BBB-(ind)’. The Outlooks on the National Long-Term ratings of FBL and SIB are Stable. Dhanlaxmi’s ratings remain on Rating Watch Negative (RWN). Fitch Ratings is a global rating agency dedicated to providing value beyond the rating through objective and balanced credit opinions, research and data.

The relative rating level of these three banks reflects the strength of their regional franchise, performance track record, profitability, and capital buffers. In particular, FBL and SIB are, in Fitch’s view, better positioned to absorb the pressures of a more challenging environment given their stronger profitability and capitalisation as well as levels of risk diversification. The prudence of each of the banks recent growth strategy (some more rapid than others) will be tested in the current economic down turn. In particular, all three banks have focused on growing their gold loan books. In Fitch’s view, the zero-risk weighting for these loans, with loan-to-value (LTV) below 75%, has inflated regulatory capital ratios. Rapid growth has led to rising balance sheet leverage and lower asset/equity ratios.

Dhanlaxmi’s RWN has been maintained due to the more immediate uncertainty created by the resignation of its auditors. The RWN would be resolved on the appointment and publication of accounts signed off by new auditors. FBL’s ratings are underpinned by its healthy capitalisation (FY12: Tier I ratio: 15.86%; Fitch Core Capital: 16.14%), robust and consistently above-system-average profitability (return on assets (ROA): 1.37% in FY12), sound customer funding profile, and its reducing reliance on bulk deposits.

SIB’s ratings are supported by its sound asset quality (gross NPL: FY12: 0.97%), satisfactory capital position (Fitch Core Capital: 12.46% in FY12), and its modest profitability (ROA: 1.1% in FY12). There is currently limited potential for an upgrade of FBL and SIB’s ratings. Any material deterioration in asset quality, loss absorption capacity, and funding mix would increase pressure on their ratings.

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