| Allahabad Bank | ||||||||||
| Removed from 'Watch Negative'; Ratings reaffirmed | ||||||||||
| Rating Action | ||||||||||
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| 1 crore = 10 million | ||||||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has removed its ratings on the debt instruments of Allahabad Bank from 'Rating watch with negative implications' and reaffirmed the 'CRISIL AA-/CRISIL A+' ratings, assigning a Negative outlook on the debt instruments of the bank. |
| Analytical Approach |
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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 |
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Strengths * Expectation of strong support from the majority owner, GoI The rating continues to factor in expectation of strong government support 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 GoI, given the criticality of the sector to the economy, 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. CRISIL believes the majority ownership creates a moral obligation on part of GoI to support the PSBs, including Allahabad Bank. GoI has infused a total of Rs 4844 crore in two tranches in Allahabad Bank in fiscal 2019 so far: Rs 1,790 crore in July 2018, and Rs3054 crore in November 2018. * Comfortable resource profile As a proportion of overall deposits, CASA deposits increased to 47.7% as on December 31, 2018, from 36.28% as on March 31, 2016. Increase in CASA, during this period, is partly attributed to demonetisation, which attracted a large volume of low-cost deposits into the banking system. 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 17.8% as on December 31, 2018, as against 16.0% as onMarch 31, 2018. Net NPAs reduced to 7.7% as on December 31, 2018, from 8.0% as on March 31, 2018, driven by higher provisions. Asset quality is peaking, and overall incremental slippages are expected to continue to lower. The bank's slippages (annualised) declined to 6.9% for the nine months ended December 31, 2018 (7.9% for fiscal 2018).While most of the stress in corporate book has been recognised, 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 have been impacted by deterioration in asset quality. The bank reported a net loss of Rs 4,500 crore in the nine months ended in December 31, 2018, as against a net loss of Rs 1,165 crore in the corresponding period of the previous fiscal. This is largely on account of higher provisioning requirement; credit cost increased to 3.6% for the nine months ended December 31, 2018, from 2.9% for the corresponding period of the previous fiscal. Nevertheless, provisioning coverage ratio (excluding technical write-offs) improved to 61.5% as on December 31, 2018, from 54.0% as on March 31, 2018. Pre-provision profits were also impacted in the current fiscal on account of losses in the trading book. The bank reported a return on assets of-2.5% for nine months ended December 31, 2018 as against -0.6% 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 |
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The bank has adequate liquidity, supported by a sizeable retail deposit base that forms a significant part of the total deposits. Liquidity coverage ratio was 226.5% as on December 31, 2018, against the regulatory requirement of 90%. The excess statutory liquidity ratio was Rs 14555.4 crore (6.8%) 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. |
| Outlook: Negative |
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Allahabad Bank should continue to benefit from strong government support. Asset quality and earnings are, however, expected to remain under pressure over the medium term. The outlook may be revised to 'Stable' if there is a substantial and sustained improvement in asset quality and earnings profile. The ratings may be downgraded if there is no material improvement in asset quality or earnings or if capital position weakens significantly over the near term. |
| About the Company |
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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 2.4 lakh crore, network of 3,238domestic branches and an overseas branch in Hong Kong as on December 31, 2018. |
| Key Financial Indicators | ||||||||||||||||||||||||||||
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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) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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