India Ratings & Research (Ind-Ra) has affirmed IDBI Bank (IDBI) long-term issuer rating at 'AA+' with a stable outlook and its short-term issuer rating at 'A1+'. Ind-Ra has also rated IDBI's proposed unsecured additional Tier I (AT1) perpetual debt instrument at 'AA-'.

IDBI's ratings are driven by Ind-Ra's expectation of continued strong support from the government of India (GoI; 76.5% stake), given its position as India's 10th largest bank in terms of assets and GoI's track record in supporting the bank. The government has supported IDBI through various regulatory forbearances in its conversion from a development financial institution (DFI) into a commercial bank and through regular capital injections over the last four years.
 
IDBI's standalone credit profile is weaker than that of other large government owned and private sector banks. This is due partly to its DFI roots that led to concentrations in both asset and liability side. Its profitability has also been weak recently due to increasing credit costs. However, the strategy of consolidation in loan growth and continued capital injections by GoI has benefitted its capitalisation. IDBI reported a common equity tier-1 ratio of 7.85% in 1QFY15. This ratio could stay moderate despite the likely equity injections from GoI, as loan growth picks up in 2HFY15. IDBI will need to raise fresh equity from capital markets over the next two-three years by diluting some of GoI's shareholding and plan for significant capital raising requirements under Basel III. According to the growth plans shared by IDBI, Ind-Ra estimates IDBI will need Rs 175 billion of Tier I capital to maintain a Tier I ratio of 10% (including capital conservation buffer of 2.5%) by FYE19.

Ind-Ra expects some near-term pressure on profitability from IDBI's weak net interest margins and high credit costs. IDBI's stressed assets are likely to remain elevated with continued uncertainty around fuel availability for the power sector and high leverage impacting corporates. However, Ind-Ra also expects the bank's focus on loan portfolio diversification (particularly towards priority sector loans) and increased push for retail liabilities to improve operating performance over the next five years. Also, IDBI's relatively stronger provision coverage, cushion from strategic investments and lower cyclical stress offer some comfort on managing its profitability over this transition period.

Shares of the bank declined Rs 2.4, or 3.25%, to settle at Rs 71.45. The total volume of shares traded was 492,874 at the BSE (Tuesday).