Crisil lowers Andhra Bank's Tier-I, Tier-II bond ratings to AA

Hyderabad: Rating agency Crisil has revised its rating lower on Andhra Bank’s Tier I perpetual bonds and upper Tier II bonds (under Basel II) to ‘CRISIL AA/Stable’ from ‘CRISIL AA+/Stable’.

Crisil said it believes that Bank’s asset quality is expected to remain under pressure over the medium term due to macroeconomic factors.

The rating downgrade reflects the weakening of Andhra Bank’s earnings profile on account of deterioration in its asset quality.

The rating, however, continues to factor in the strong support that Andhra Bank will receive from the Government, and the bank’s comfortable capitalization, Crisil said in its report.

Explaining the rationale behind downgrading , Crisil said the bank has modest earnings profile as reflected in its lower-than-industry-average return on assets (RoA).

The bank’s RoA has declined sharply to 0.4 percent (annualised) for the six months ended September 30, 2013 from around 1.0 percent in 2012-13 (refers to FY 13) primarily because of higher provisions given the deterioration in the bank’s asset quality, and decline in interest margins.

The bank’s cost of borrowings at 7.4 percent (annualised) for the six months ended September 30, 2013, continues to remain higher than industry average due to the lower proportion of low-cost current account and savings account (CASA) deposits (24 percent as on September 30, 2013), the report further said.

“Crisil believes that Andhra Bank’s profitability is likely to remain modest over the medium term, given the asset quality challenges faced by the bank,” the rating agency said.

Andhra Bank’s asset quality is modest, with higher-than- industry-average gross non-performing assets (NPAs) and weak assets.

The increase in gross NPAs was mainly due to deterioration in large and medium corporate advances, given the weak macro-economic environment, it said.

“CRISIL believes that Andhra Bank’s asset quality will remain under pressure over the medium term, given the challenging macro-economic environment and the bank’s sizeable exposure to vulnerable sectors such as infrastructure and iron and steel,” it said.

Terming the outlook as “stable”, Crisil said it may be revised to “Positive” in case of sustained and significant improvement in Andhra Bank’s asset quality and earnings profile.

Conversely, sustained weakening in the bank’s earnings profile, affecting its ability to maintain comfortable capitalisation, may lead to a revision in the outlook to “Negative”, it added.

PTI