Another One

Dec 31, 2007 (LBO) – Fitch Ratings has downgraded the State Mortgage and Investment Bank (SMIB) by one notch to A-(lka) and lowered its rating outlook to negative from stable, just as it downgraded HDFC Bank, another mortgage lender. "The rating downgrade reflects SMIB's deteriorating profitability brought on by its inherent interest rate risk, and the escalation of such risk in the current interest rate environment," Fitch said.

"The rating also factors in SMIB's state ownership, comfortable capital position, as well as the manageable and relatively low ultimate credit risk inherent in residential housing finance."

"The revision of the Outlook to Negative reflects Fitch's views on the continuing challenges that will be faced by the bank in arresting its deteriorating profitability over the ensuing 12-18 months, in the prevailing weak macroeconomic environment."

Fitch said SMIB was exposed to a "significant level" of interest rate risk from a maturity mismatch between its funding and interest earning assets.

While most of the housing loans were given to fixed income earners from low and middle income segments for 15 years at fixed rates, more than 60 percent of its funding by the third quarter of 2007 was from fl