(The following statement was released by the rating agency)
July 25 - Fitch Ratings has affirmed India-based Kotak Mahindra Bank Ltd’s (KMB) National Long-Term Rating at ‘Fitch AA+(ind)’ with a Stable Outlook. In addition, KMB’s National Short-Term Rating has been affirmed at ‘Fitch A1+(ind)'. A full rating breakdown is provided below.
KMB’s ratings benefit from the bank’s consistently above-average core capital, which together with its risk management capabilities, partly mitigates cyclical asset quality pressures on the group’s loan portfolio. The ratings are constrained by KMB’s small franchise and greater wholesale funding profile compared with higher-rated private banks. The bank’s consistently above-average loan growth and portfolio concentration in cyclical sectors also constrain the ratings.
KMB’s reported Tier 1 capital stood at 15.74% in the financial year ended March 2012 all of which was in the form of core equity. Fitch expects KMB’s Tier 1 capital to remain over 12%; especially as the bank is expected to continue raising equity to adhere to regulatory guidelines to dilute sponsors’ shareholding to 20% by 2018 from 45%. In Fitch’s view KMB’s above-average capital position is vital for its high concentrations in segments like commercial vehicle (15% of gross loans), loans secured by property (mainly to small businesses/self-employed) (11%) and real estate (13%). While historically strong KMB’s loan portfolio may face asset quality pressures in FY13 and FY14 given India’s economic slowdown.
Funding remains weaker than peers and higher-rated banks due to a still small, albeit expanding, franchise and rapid loan growth, which cannot be fully sustained by retail deposits. Although low-cost retail current and savings deposit have been increasing, KMB still relies on bulk deposits for about 29% of its funding, which is higher than peers. Nonetheless, liquidity risks arising out of weak funding are partly mitigated by an evenly matched asset-liability maturity profile and KMB’s reliance on long-term refinance lines of around INR40bn from various Indian policy institutions.
The ratings may be downgraded if KMB fails to consistently maintain its above average Tier 1 and core capital position. The ratings may also be downgraded if continued high loan growth or concentrations start to put pressures on its loan portfolio. Upgrade would depend on sustained improvement in funding and franchise, increased portfolio diversity, and continued strong financials, which is unlikely over near term.
National Long-Term Rating affirmed at ‘Fitch AA+(ind)'; Outlook Stable
National Short-Term Rating affirmed at ‘Fitch A1+(ind)’
INR7.25bn Lower Tier 2 subordinated debt affirmed at ‘Fitch AA+(ind)’
INR1.5bn Upper Tier 2 subordinated debt affirmed at ‘Fitch AA(ind)’