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Thursday, May 22, 2014

Moody's: Exim India well placed to absorb asset quality stress

Moody's Investors Service says that while the asset quality of Export-Import Bank of India (Exim India, Baa3 stable, ba2 stable) has deteriorated in the twelve month period ended March 2014, it is still well placed to absorb asset quality stress. 

"As is the case of other Indian banks with corporate exposures, Exim India has seen increasing pressure on the quality of its loan book over the last 12-18 months," says Srikanth Vadlamani, a Moody's Vice President and Senior Analyst. 

"However, there are a number of factors that we believe have contained the impact on Exim's credit profile from these asset quality rpessures, which led us to maintain our ba2 baseline credit assessment on Exim India," says Vadlamani. 

First, a large portion of Exim India's loan book is structurally safer when compared with the loan books of other Indian state-owned banks. 

A large portion of Exim India's loan book (45%) consists of a mix of loans to foreign governments that are backed by an explicit guarantee from the Government of India (Baa3 stable) and loans to other banks in India, the majority of which is implicitly supported by the government. 

As such, much of its loan book is structurally immune to typical commercial credit-cost risks.
Second, diversification and strong loss-absorbing buffers will contain the risks associated with corporate loans. 

"The broad diversification characterizing the corporate side of the loan book will help avoid any dramatic decline in asset quality and in Exim India's strong buffers against downside scenarios," says Vadlamani. 

The bank benefits from a reasonably high net interest margin when adjusted for the underlying credit risk. 

This situation, along with a very low cost-income ratio, has enabled it to maintain healthy profitability, with pre-provision income (PPI)/risk weighted assets standing at 3.8% in the fiscal year ending 31 March 2013 (FY2013). 

The high level of PPI has also enabled the bank to set aside sufficient provisions and maintain a high provision coverage of 80% at 31 March 2013, despite deteriorating asset quality. 

The bank's capital levels are also significantly higher than those of its Indian peers, with a Tier 1 ratio of 13.7% at 31 March 2013. 

Another factor that helps absorb asset quality stress is the bank's conservative asset-liability management, which mitigates some of the risks associated with its dependence on wholesale funding. 

The bank has no retail franchise and is wholesale funded, which can be viewed as a structural weakness. But, as a policy bank, Exim India's market access and cost of funds are closely tied to its relationship with the government. 

This relationship gives it an edge over conventional banks with the same characteristics in terms of funding stability. 

On 3 April 2014, Moody's affirmed the Baa3 rating of Exim India's deposits and long-term senior unsecured debt with a stable outlook. 

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