Exim bank affirmed IND AAA

The Outlook is Stable!

India Ratings and Research (Ind-Ra) has affirmed Export-Import Bank of India’s (EXIM) Long-Term Issuer Rating at ‘IND AAA’. The Outlook is Stable. The instrument-wise rating action is as follows:

Support from GoI:

The affirmation reflects Ind-Ra’s expectation of a high probability of continued timely support to EXIM from the government of India (GoI). EXIM, which is wholly owned by the GoI, acts as an agent of the GoI by extending lines of credit to various economies (mostly developing) as per the GoI’s directives. The GoI appoints EXIM’s board of directors according to the statutes of the Export-Import Bank of India Act, 1981, under which the latter was established. EXIM’s board has representation from the ministries of finance, commerce and industry, and external affairs.

Bank’s Export Facilitation Role:

EXIM’s policy objectives include facilitating export credit and developing export-generation capabilities among Indian companies, thereby playing a role in financing, facilitating and promoting India’s foreign trade. Exposure under the lines of the credit segment forms a growing proportion of EXIM’s loan portfolio, and is entirely guaranteed by the GoI. Ind-Ra expects the GoI’s support to continue, given the importance of EXIM’s role in implementing foreign trade policies.

Comfort in Loan Book Driven by Government Guarantee:

EXIM’s gross advances were INR1,019 billion in 9M FY19 (FY18: INR1,155 billion; FY17: INR1,078 billion), with the line of credit and refinancing portfolios accounting for around 37% and 4% of the book. The lines of credit, which are backed by government guarantees, are virtually risk-free, given EXIM enjoys availability of interest equalisation and credit guarantee from the GoI, thus reducing the credit risk on this portfolio.

Furthermore, the credit risk on the refinance portfolio is on the corresponding bank, thereby reducing the overall risk for EXIM. The bank is facing asset quality issues related to loans to corporates and small and medium enterprises. Ind-Ra expects EXIM to maintain stable loan book growth, broadly with the same portfolio mix.

Comfortable Capitalisation; Superior Fund-Raising Ability:

EXIM’s strong links and high importance to the GoI are evident by the numerous instances of financial support extended to EXIM. The bank received a capital infusion of INR50 billion in FY19 (FY18: INR5 billion; FY17: INR5 billion; FY16: INR13 billion) and will receive INR15 billion in FY20.

EXIM’s capitalisation is comfortable (Tier I capital ratio – 9MFY19: 11.1%; FY18: 8.8%; FY17: 14.3%; FY16 13.0%), as it is aided by regular equity injections from the GoI. The capitalisation level of EXIM is likely to have further improved at FYE19 on account of a capital infusion of INR45 billion in 4QFY19.

Aided by the market’s quasi-sovereign perception of EXIM due to the vital policy role that it plays, EXIM raises wholesale funds at highly competitive interest rates in both domestic and international capital markets.

Asset Quality and Profitability:

EXIM’s asset quality remained under pressure in 9MFY19, given its gross non-performing asset (NPA) ratio was 12.63% (FYE18: 10.37%; FYE17: 9.24%) and net NPA ratio was 3.79% (3.75%; 4.68%). The pressure was also due to the stringent RBI guidelines related to the resolution of stressed and restructured assets. While the bank’s asset profile naturally shows concentration to export-oriented businesses and sectors, the largely secured or guaranteed nature of its loan book addresses this concern.

Owing to the provisioning requirement as a result of the reclassification to the NPA, the profitability metrics remained under pressure in FY18. EXIM registered a net loss of INR29 billion for FY18 (FY17: net profit INR0.4 billion), with return on average assets at negative 2.43% (FY17: 0.04%) and return on average equity at negative 27.0% (0.3%). However, EXIM reported a net profit of INR0.85 billion for 9MFY19.

Rating Sensitivities- Negative: 

A Negative Outlook could result in case of Ind-Ra’s expectation of reduced support from the GoI. This could result from a dilution in EXIM’s policy role of promoting and financing India’s foreign trade or a significant reduction in the GoI’s shareholding in the bank. However, Ind-Ra views these events as highly unlikely over the near to medium term.