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Monday, November 28, 2011

Fitch revises Dhanlaxmi Bank outlook to ‘stable'

Rating agency Fitch Ratings has revised Dhanlaxmi Bank's outlook to ‘stable' from ‘positive'. The outlook revision reflects expectations that structural challenges facing the bank, from its aggressive expansion in recent years, are unlikely to improve its overall credit profile in the short to medium-term. 

Since FY'09 (end-March 2009), the bank's operating performance has been impacted by substantial loan growth, which is being increasingly funded through wholesale deposits, and from large investments in infrastructure and other resources. The bank has increased its branch network by 40 per cent and headcount by three times since FY'08. Amid low net interest margins and a significantly high operating cost base, profitability remains weak, Fitch said in a press release.

Dhanlaxmi Bank's asset quality has remained stable so far, with a gross non-performing asset ratio of 0.55 per cent and a net NPA ratio of 0.17 per cent as on end-September 2011. However, the moderating economic growth and high interest rate environment may impact its loan portfolio, a large part of which is not seasoned.

The bank expects to grow at a slower rate in the current financial year after the aggressive 81 per cent loan growth in FY11. However, its capitalisation is weakening (Tier I ratio: 8.73 per cent in H1 2011-12, against 9.41 per cent in 2010-11) from low internal capital generation, while raising fresh common equity is difficult in the current equity market environment, the release said.

The agency said that ratings may be downgraded if there is a significant deterioration in capitalisation or there are any signs of deterioration in the bank's funding. A rating downgrade may also result from any stresses on asset quality that may lead to a sharp drop in earnings or net losses.

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