Fitch lowers Dhanlaxmi Bank's outlook to 'stable'

"The outlook revision reflects Fitch's 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," Fitch said in a statement.

It said the bank expects to grow at a slower rate in the current fiscal after the aggressive 81 per cent loan growth in 2010-11. Also, its capitalisation is weakening from low internal capital generation.

"The 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," Fitch said.

It said that since 2008-09 fiscal, Dhanlaxmi 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.

"Amid low net interest margins (NIMs) and a significantly high operating cost base, profitability remains weak," Fitch said, adding that the bank's asset quality has remained stable.

"However, moderating economic growth and high interest rate environment may impact its loan portfolio, a large part of which is not seasoned," Fitch noted.

Besides, Fitch has affirmed National Long-Term rating and the Rs 170 million lower Tier-II debt of the bank at 'BBB(ind)'.