| Allahabad Bank | ||||||||||||
| 'CRISIL AA-' assigned to Tier II Bonds (Under Basel III); Ratings placed on 'Watch Positive' | ||||||||||||
| Rating Action | ||||||||||||
| ||||||||||||
| 1 crore = 10 million | ||||||||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
|
CRISIL has assigned its 'CRISIL AA-' rating to Rs.1500 Crore Tier II Bonds (Under Basel III) of Allahabad Bank while placing its ratings on 'Rating Watch with Positive Implications'. |
| Analytical Approach |
|
For arriving at the ratings, CRISIL has factored in the support the bank is expected to receive from GoI. This is because GoI is both the majority shareholder in public sector banks (PSBs) and the guardian of India's financial system. The stability of the banking sector is of prime importance to GoI, given the criticality of the sector to the economy, the strong public perception of government backing for PSBs, and the severe implications of any PSB failure in terms of political fallout, systemic stability, and investor confidence in public sector institutions. |
| Key Rating Drivers & Detailed Description |
|
Strengths: * Expectation of strong support from the majority owner, GoI The rating factors in expectation of strong government support, both on an ongoing basis and in the event of distress. This is because GoI is both the majority shareholder in public sector banks (PSBs) and the guardian of India's financial system. The stability of the banking sector is of prime importance to the government, given the criticality of the sector to the economy, the strong public perception of sovereign backing for PSBs, and the severe implications of any PSB failure in terms of political fallout, systemic stability, and investor confidence in public sector institutions. The majority ownership creates a moral obligation on GoI to support PSBs, including Allahabad Bank. As a part of the Indradhanush framework, the government had pledged to infuse at least Rs 70,000 crore in PSBs over fiscals 2015 to 2019, of which Rs 25,000 crore each was infused in fiscals 2016 and 2017. Further, in October 2017, the government had outlined a recapitalisation package of Rs 2.11 lakh crore over fiscals 2018 and 2019. In August 2019, the government announced the first round of capital infusion (of around Rs 55,250 crore) in 10 PSBs (of the total Rs 70,000 crore proposed for fiscal 2020). GoI infused Rs 11740 crore in Allahabad Bank in fiscal 2019. * Comfortable resource profile As a proportion of overall deposits, CASA deposits stood at 48.1% as on September 30, 2019, (49.5% as on March 31, 2019). The bank has strong CASA base on account of its branch network in the northern and eastern states. Resource profile should remain comfortable over the medium term, supported by the bank's well-established market position in central and eastern India, where a stable deposit base has been maintained. Weaknesses: * Weak asset quality Asset quality remains under stress, with gross NPAs at 19.05% as on September 30, 2019, as against 17.55% as on March 31, 2019. Net NPAs has increased to 5.98% as on September 30, 2019, from 5.22% as on March 31, 2019. The bank's slippages (annualised) stood at 10% (Rs. 7125 crore) for H1FY20 (7.1% (Rs. 10726 crore) for fiscal 2019). Increase in slippages was driven by the agriculture segment (Rs. 3800 crore) in H1FY20. However, slippages in the corporate book has been on a declining trend with most of the stress in corporate book having been recognised. Nevertheless, performance of the agriculture and SME book will remain a monitorable. While the bank is focusing on improving its collection and recovery mechanism to improve its asset quality, its ability to control slippages and increase the loan portfolio to less risky segments remains a key monitorable over the medium term. * Weak earnings profile Earnings profile has been impacted by the deterioration in asset quality. The bank reported a net loss of Rs 1986 crore in half year ended in September 30, 2019, as against a loss of Rs. 3767 crore in in the corresponding period of the previous fiscal. Losses are largely on account of higher provisioning requirement; credit cost stood at 3.0% for the half-year ended September 30, 2019, as against 4.1% for the corresponding period of the previous fiscal. Nevertheless, provisioning coverage ratio (excluding technical write-offs) improved to 73.0% as on September 30, 2019, from 54.0% as on March 31, 2018. The bank reported a return on assets of -1.63% for half year ended in September 30, 2019 as against -3.16% for corresponding period of the previous fiscal. The ability of the bank to improve its asset quality, and hence profitability, is a key monitorable. |
| Liquidity Superior |
|
The bank has superior liquidity, supported by a sizeable retail deposit base that forms a significant part of the total deposits. Liquidity coverage ratio was 161.6% as on September 30, 2019, against the regulatory requirement of 100%. The excess statutory liquidity ratio was 61.6% as on that date. The bank's liquidity also benefits from access to systemic sources of funds such as the liquidity adjustment facility from the Reserve Bank of India, access to the call money market, and refinance limits from sources such as National Housing Bank and National Bank for Agriculture and Rural Development. |
| Rating Sensitivity factors |
|
Upward factors: * Completion of the proposed amalgamation with Indian Bank * Improvement in asset quality and profitability on a sustained basis Downward factors: * Higher than expected deterioration in asset quality thereby impacting earnings profile * Decline in capital adequacy ratios below minimum regulatory requirements (including CCB, which is Tier I of 9.5% and overall CAR of 11.5% as on March 31, 2020) for an extended period |
| About the Bank |
|
Founded in April 1865 by a group of Europeans in Allahabad (Uttar Pradesh), Allahabad Bank is a medium-sized public sector bank with an asset base of Rs 2.45 lakh crore, network of 3,174 domestic branches as on September 30, 2019. |
| Key Financial Indicators | ||||||||||||||||||||||||||||
|
|
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
| Note on Tier-II Instruments (Under Basel III) | ||||||||||||||||||||||||||||||||||||||||||
| The distinguishing feature of Tier-II capital instruments under Basel II is the existence of the point of non-viability (PONV) trigger, the occurrence of which may result in loss of principal to the investors and hence, to default on the instrument by the issuer. According to the Basel III guidelines, the PONV trigger will be determined by the Reserve Bank of India (RBI). CRISIL believes the PONV trigger is a remote possibility in the Indian context, given the robust regulatory and supervisory framework, and systemic importance of the banking sector. The inherent risk associated with the PONV feature is adequately factored into the rating on the instrument. | ||||||||||||||||||||||||||||||||||||||||||
| Note on hybrid Instruments (Under Basel II) | ||||||||||||||||||||||||||||||||||||||||||
| Given that hybrid capital instruments (Tier-I perpetual bonds and Upper Tier-II bonds; under Basel II) have characteristics that set them apart from Lower Tier-II bonds (under Basel II), the ratings on the two instruments may not necessarily be identical. The factors that could trigger a default event for hybrid instruments include: the bank breaching the regulatory minimum capital requirement, or the regulator's denial of permission to the bank to make payments of interest and principal if the bank reports losses. Hence, the transition from one rating category to another may be significantly sharper for these instruments than in the case of Lower Tier-II bonds; this is because debt servicing on hybrid instruments is far more sensitive to the bank's overall capital adequacy levels and profitability. | ||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Instrument(s) | ||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Rating Withdrawn | ||||||||||||||||||||||||||||||||||||||||||
|
| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| For further information contact: | ||||||
|