S&P downgraded credit rating of Indian Overseas Bank to speculative grade

Global rating agency Standard & Poor on 3 November 2014 lowered credit rating of state-owned Indian Overseas Bank (IOB) to speculative grade.

S&P revised its assessment of the bank's risk position to weak from moderate. Accordingly, it lowered the rating of IOB to BB from BB+ on weak asset quality. The rating will remain weak over the next 12 months.

The rating continues to reflect IOB's adequate business position, moderate capital and earnings, above average funding, and strong liquidity.

Reason for the decision
The bank's exposure to high-risk sectors, such as iron and steel and textiles, is greater than that of other banks.
The bank's reported non-performing loan ratio rose sharply to 7.3 per cent as of 30 September 2014, from 5 per cent as of 31 March 2014 to become the highest among the Indian banks that are rated.

The share of gross standard restructured loans outstanding in IOB's loan book is also high at 7.85 per cent.
The move will affect the credit cost of the IOB. IOB's credit costs will remain high because of the bank's weak asset quality.

However, the rating agency, mentioned that it could upgrade the rating if its risk management improves, and its asset quality improves sharply and is more in line with that of the industry.