The recent investment in the oil and gas giant ONGC and in number of state-run banks has cost the country’s largest financial institution Life Insurance Corporation (LIC) its higher rating today from the global rating agency Moody’s,which downgraded it from Baa3 to Baa2,but with a stable outlook.
Moody’s has also revised three Indian banks’ standalone and hybrid debt ratings – Axis Bank,HDFC Bank & ICICI Bank Limited.
“LIC’s increased investment in ONGC and increasing investment in public sector banks are credit-negative,” Moody’s Investors Service analyst and assistant vice-president for financial institutions group Stella Ng said,adding that its overexposure to the state-run banks is also a concern.
Ng,however,added that the agency “sees no change to LIC’s rating after sovereign rating action and therefore retain our stable outlook for the company.”
The downgrade relates to LIC’s foreign currency insurance financial strength rating and concludes the review for possible downgrade initiated on April 30,2012.
The city-based LIC could not be immediately contacted for their reaction to the downgrade.
This revision comes in the context of an ongoing global review by Moody’s,affecting financial institutions,whose ratings are higher than the rating of the government where they are domiciled.
Giving the rationale for the downgrade,Moody’s said,”It reflects our assessment that LIC’s creditworthiness is highly correlated with that of the government’s credit strength,considering (a) the extent to which its business depends on the domestic economy; (b) the limited degree of cross-border diversification within its operation; (c) its significant level of balance-sheet exposure to domestic sovereign debt,relative to its capitalisation; and (d) the absence of strong foreign ownership.”
Last month,S&P had warned of a sovereign downgrade while revising downward the country’s credit rating close to junk status at BBB-.
Reportedly under the government order,LIC had picked over 90 per cent of the 5 per cent follow-on offer from the state-run ONGC early March for a premium,but since then,the oil major’s scrip has been trading very low. Every analyst and economist had blamed LIC for its investment.
During the Q4 of last fiscal,LIC was again forced to increase its stakes in state-run banks like Syndicate Bank,Bank of Maharashtra and IOC among others,as the cash-starved government did not have the funds to pick state as part of the fund infusion into banks.
Accordingly,LIC’s stake in many banks are above the Irda-mandated 10 per cent but closer to 15 percent.
Moody’s said since LIC is 100 percent owned by the government and generates almost all its premia from the country,it reflects the corporation’s concentration in one market and its high reliance on the domestic economy,apart from its exposure to an evolving operating environment.
“Therefore,there is little reason to believe that LIC will be insulated from any government debt crisis,if it were to occur,” Moody’s said.
“LIC has meaningful and rapidly increasing direct or indirect exposures to the government through its holdings of government securities and its equity investments in government-related entities,including banks and corporations,” it said.
As of December 31,2011,the ratio of government securities to adjusted shareholders’ equity in LIC was 764 per cent (excluding unit-linked invested assets),said the agency,adding therefore it considers the lower rating,which is now positioned at the rating of the government,as more appropriate to capture the credit profile of the corporation.
The agency further said these rating actions derive from our updated assessment of the linkage between the credit profiles of sovereigns and other institutions domiciled within the sovereign,which is discussed in the rating implementation guidance.
In addition,the government guarantees all of LIC’s policy liabilities,including associated declared bonuses,as prescribed in the LIC Act. Thus,Moody’s views that LIC’s credit strength is very much closely linked to the sovereign,which justifies the insurer’s current rating.
Moody’s downgrades ICICI,HDFC Bank,Axis
Moody’s downgraded the country’s three largest private sector lenders — ICICI Bank,HDFC Bank and Axis Bank — to D+ from C- to align them with the sovereign rating.
As a result,the hybrid debt ratings of these banks,except HDFC Bank,will be negatively impacted.
The standalone bank financial strength rating (BFSR) of ICICI,HDFC and Axis are revised down to D+ from C-,which now maps to a baseline credit assessment (BCA) of Baa3 from Baa2 on the long-term scale,Moody’s Investors Service said in a statement issued in Singapore.
The agency also downgraded the hybrid ratings of Axis Bank and ICICI Bank to Ba3 from Ba2. But it said all the revised ratings carry stable outlooks.
“The rating action follows in the context of the ongoing global review affecting all banks whose standalone ratings are higher than the rating of the government where they are domiciled,and they conclude the review that was initiated on April 30,2012,” Moody’s Investors Service vice-president and senior credit officer at financial institutions group,Beatrice Woo,said in the statement.
The affected banks downplayed the rating action,saying this is in line with the sovereign rating and does not in any new way negatively reflect their credit standing.
Moody’s also said the other ratings of these banks are unaffected and have stable outlooks as detailed below.
“Our review indicates that there are little reasons to believe that these banks will be insulated from a government debt crisis. More particularly,we note their significant direct exposure to the government securities,equivalent to 239 per cent of tier 1 at Axis Bank,226 per cent of tier 1 at HDFC Bank and 143 per cent of tier 1 capital at ICICI Bank (based on latest publicly available data).
“In addition,these banks are primarily domestic institutions with similar macroeconomic exposures as the sovereign government. Therefore,we view the lower standalone ratings — which are now positioned at the rating of the government — as more appropriate to capture the credit profiles of the banks,” Wood said in the statement.
Explaining the rationale for the downgrade,Woo said,”The action reflects that their credit worthiness are highly correlated with that of the government’s credit strength taking,into account (a) the extent to which their business depend on the domestic macroeconomic and financial environment,(b) the degree of reliance on market-based,and therefore more confidence-sensitive,funding and (c) their direct or indirect exposures to domestic sovereign debt,compared with their capital bases.”
For all the banks,the key drivers for the rating action were (a) relatively low level of cross-border diversification of their operations,(b) high level of balance-sheet exposure to domestic sovereign debt,compared to their capital bases,(c) franchise resilience and intrinsic strength within the operating environment and (d) absence of ongoing support from foreign ownership.
She further said these rating actions derive from Moody’s updated assessment of the linkage between the credit profiles of sovereigns and other institutions domiciled within the sovereign.
On the downward revision of Axis Bank and ICICI Bank’s hybrid debt,she said,”Their adjusted BCA is in line with their respective BCA as no parental or cooperative support is imputed. Therefore,a lower BCA becomes the starting point for notching hybrid securities and results in lower hybrid ratings in both banks’ cases.”
The starting point for rating hybrid securities is the adjusted BCA,which reflects a bank’s standalone credit strength as expressed through its BCA and includes uplift from parental and/or cooperative support,if applicable,but excludes systemic support,Moody’s said.
As of March 2012,ICICI Bank had an asset base of Rs 4.74 trillion,HDFC Bank had Rs 3.4 trillion and Axis Bank Rs 2.85 trillion.