Credit woes: Moody’s downgrades LIC, three private banks
Moody's cut its rating for state-run Life Insurance Corp of India (LIC) two weeks after it put the country's largest portfolio investor under review for a downgrade over its high exposure to sovereign debt and lack of revenue sources outside of India.business Updated: May 14, 2012 22:06 IST
Credit rating agency Moody’s Investors Service on Monday downgraded India’s largest life insurance company, Life Insurance Corporation of India (LIC), to Baa3, from Baa2. The agency has said that the new rating aligns with the credit strength of the government.
Policy holders, however, have little to fear. “This downgrade does not lead to any kind of deferment of payments from the insurer,” said Surya Bhatiya, principal consultant, Asset Managers.A Baa rating for insurance firms signifies that in the long term, an insurance company’s ability to meet policyholder obligations may be affected. A Baa3 rating is at the lowest end of the scale, while Baa1 is at the highest end.
Besides LIC, Moody’s also downgraded the debt ratings of three private sector Indian banks — Axis Bank, HDFC Bank and ICICI Bank — to D+ from C-.
A D rating for banks indicates that their financial fundamentals may be deficient in one or more aspects and have a modest intrinsic financial strength, requiring some infusion of funds.
Monday’s downgrade comes within a fortnight of Moody’s placing the companies on a ratings watch for a possible downgrade in its advisory on April 30.
Regarding LIC, Moody’s expressed concern over the insurance company’s increased equity stake in public sector banks, as well as the bailout act it performed for the government in its purchase of ONGC's shares at the auction in March.
Citing the government’s 100% equity control in LIC, Moody's said: “There is little, if any, reason to believe that LIC would be insulated from any government debt crisis, if it were to occur.” The agency also cited the absence of foreign ownership in LIC a factor in the downgrade.
Expressing a similar concern for the three banks, Moody's said they had “significant direct exposure to the Indian government securities, equivalent to 239% of tier 1 (capital) at Axis Bank, 226% of tier 1 (capital) at HDFC Bank and 143% of tier 1 capital at ICICI (Bank).”
Analysts, however, said that there was no threat to depositors’ money. “We do not believe this would have any material impact on the financial strength of these banks,” said Dipen Shah, head of fundamental research, Kotak Securities. “This downgrade has to do more with the lower sovereign ratings of India. The standalone credit assessment ratings of these banks were above India's sovereign debt rating.”
The new ratings for the all the four financial institutions were now aligned with the credit rating of the government.