India Ratings and Research (Ind-Ra) has affirmed Indian Bank's (IB) long-term issuer rating at 'AA+' with a stable outlook. The agency has also affirmed the bank's short-term issuer rating at 'A1+'.

The affirmation reflects the bank's ability to consistently maintain above-average capital ratios, and its strong liquidity profile compared with its peers in the 'AA' rating category. However, the ratings are constrained by the weakening profitability and credit-cost buffers due to IB's modest franchise and high restructured loan portfolio.

IB's common equity Tier-1 ratio was 10.6% at 9MFYE15, well above the range of 8%-9% for most similarly rated government banks. The ratio improved further with the capital infusion of Rs 2.8 billion by the government of India in end-March 2015. Ind-Ra estimates the additional capital requirement of Rs 55.7 billion over the Basel III transition period, which the bank should manage comfortably. IB is likely to maintain its CET1 ratio well above 9% during this period owing to its moderate loan growth expectations (around 15%), in line with the decline in its profitability.

The bank's pre-provision operating margin steadily declined over the last two years and stood at 1.5% of assets in 1HFY15, lower than that of peers. The decline was primarily led by a fall in net interest margin to 2.5% at 9MFY15, due to increasing stressed assets. The profitability was also impacted by higher operating costs led by revisions in wage bills and relatively low fees income proportion. While IB plans to focus more on high-yielding agriculture and small business loans, Ind-Ra expects the high proportion of restructured assets and increasing slippages to keep yields under pressure over the medium term. Regional concentration could also restrict the bank's ability to reduce funding costs by garnering low-cost current and savings account (CASA) deposits which could pressure profitability further. The agency expects return on average assets to remain between 0.5% and 0.6% over the next two years.

Shares of the bank gained Rs 0.35, or 0.24%, to trade at Rs 144. The total volume of shares traded was 9,859 at the BSE (2.48 p.m., Thursday).