Rating Rationale
June 03, 2020 | Mumbai
Canara Bank
'CRISIL AAA/Watch Developing' assigned to Tier II Bonds (Under Basel III) and Lower Tier II Bonds (Under Basel II) ; 'CRISIL AA/Watch Developing' assigned to Tier I Bonds (Under Basel III) ; Long-term rating continues on 'Watch Developing' 
 
Rating Action
Rs.3250 Crore Tier I Bonds (Under Basel III)* CRISIL AA (Assigned; Placed on 'Rating Watch with Developing Implications')
Rs.3400 Crore Tier II Bonds (Under Basel III)* CRISIL AAA (Assigned; Placed on 'Rating Watch with Developing Implications')
Rs.1000 Crore Lower Tier II Bonds (Under Basel II)* CRISIL AAA (Assigned; Placed on 'Rating Watch with Developing Implications')
Rs.2500 Crore Tier I Bonds (Under Basel III)   CRISIL AA (Continues on 'Rating Watch with Developing Implications')
Tier II Bonds Aggregating Rs.7900 Crore (Under Basel III)  CRISIL AAA (Continues on 'Rating Watch with Developing Implications')
Upper Tier-II Bonds Aggregating Rs.1000 Crore (Under Basel II)  CRISIL AAA (Continues on 'Rating Watch with Developing Implications')
Perpetual Tier-I Bonds Aggregating Rs.749.3 Crore (Under Basel II) CRISIL AAA (Continues on 'Rating Watch with Developing Implications')
Rs.30000 Crore Certificate of Deposits  CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
*Originally issued by erstwhile Syndicate Bank
Detailed Rationale

CRISIL has assigned its 'CRISIL AAA/Rating Watch with Developing Implications' rating to Rs 3,400 crore Tier II Bonds (under Basel III) and Rs 1,000 crore lower Tier II Bonds (under Basel II) and 'CRISIL AA/Rating Watch with Developing Implications' rating to Rs 3,250 crore Tier I Bonds (under Basel III). The ratings on other long-term debt instruments continue on 'Rating Watch with Developing Implications'.
 
Earlier, on December 17, 2019, CRISIL has placed its rating on the long-term debt instruments of Canara Bank on 'rating watch with developing implications. The rating on the certificates of deposit programme was reaffirmed at 'CRISIL A1+'. This was owing to significant progress on the proposed amalgamation of 6 public sector banks (PSBs) into 4 anchor PSBs, including amalgamation of Syndicate Bank with Canara Bank.
 
On August 30, 2019, Ministry of Finance announced a set of reforms for PSBs including consolidation, capital infusion and measures to enhance governance standards. A key announcement was also the amalgamation of 6 PSBs into 4 anchor PSBs. In September 2019, in-principle approval from the Boards of Directors of both the merging banks was received. Later, in November 2019, Alternative Mechanism accorded its in-principal approval for the merger of Canara Bank and Syndicate Bank. Moreover, CRISIL has had discussions with several of the amalgamating banks and understands that the integration process in terms of branch rationalisation, alignment of policies, processes and products, joint training of staff, etc., is already underway. Based on the same, rating on the long-term debt instruments of Canara Bank was placed on 'rating watch with developing implications.
 
The cabinet provided its approval on March 4, 2020. The Board of Directors of both the banks finalised the share exchange ratio on March 5, 2020, and the merger got effective from April 01, 2020.
 
CRISIL will resolve the rating watch once clarity emerges on the merged entity's business and financial risk profiles. CRISIL will monitor for potential integration challenges and any impact on the earnings profile of the merged entity. The asset quality of the merged entity will also be a monitorable given the current challenging macro environment. On resolution of the rating watch, the rating on the new instrument is unlikely to move by more than one notch.
 
In terms of pro-forma merged financials, the merged bank would have total assets of Rs 10.5 lakh crore, with gross non-performing assets (NPAs) of 9.4% as on December 31, 2019. Common equity tier I (CET-I), Tier I, and overall capital adequacy ratio (CAR) would be at 10.1%, 11.2% and 14.0%, respectively, as on same date. On the business side, there are potential synergies stemming from a larger distribution network with deeper penetration in key states and operational efficiencies.
 
The ratings on the debt instruments of Canara Bank continue to factor in the expectation of strong support from the majority owner, Government of India (GoI), and the bank's healthy market position and adequate capitalisation. The ratings also factor in the modest asset quality and average earnings profile.
 
The nationwide lockdown (originally till April 14, 2020), declared by GoI to contain the spread of Covid-19 pandemic, will have a near-term impact on disbursements and collections of financial institutions. The lockdown has been extended till May 31, 2020, and restrictions may eventually be lifted in a phased manner. Any delay in return to normalcy will exert further pressure on collections and hence asset quality metrics. The bank has also offered moratorium to their borrowers and hence, the collections are expected to be low in the near term. Additionally, any change in the behavior of borrowers on payment discipline can affect delinquency levels post the moratorium.

Given this, gross NPAs of Canara Bank could increase from current levels due to higher deterioration across most of the segments. This in turn could lead to higher credit cost thereby impacting the profitability of the bank and will remain a key monitorable.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profile of Canara Bank and its subsidiaries and associates. This is because of majority shareholding, business and financial linkages and shared brand. The ratings on Canara Bank's debt instruments continue to factor in strong support that the bank is expected to receive from GoI. This is because GoI is both the majority shareholder in 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 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.
 
Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths
* Strong expectation of support from GoI
In its ratings on PSBs, CRISIL continues to factor in the strong government support as the Central government is both the majority shareholder and the guardian of India's financial system. Stability of the banking sector is of prime importance to the government, given criticality of the sector to the economy, strong public perception of sovereign backing for PSBs, and severe implications of failure of any PSB in terms of political fallout, systemic stability, and investor confidence in public sector institutions. Majority ownership creates a moral obligation on the part of the government to support PSBs, including Canara Bank. GoI infused Rs 4,865 crore in Canara Bank in fiscal 2018 and Rs 6,571 crore in fiscal 2020.
 
* Healthy market position
Canara Bank is one of India's larger PSBs, with total advances and deposits at Rs 4.4 lakh crore and Rs 6.3 lakh crore, respectively, as on December 31, 2019. It had a market share of around 4.6% and 4.8%, respectively, in advances and deposits. The bank also has a pan-India branch presence, with around 6,328 branches and 8,873 automated teller machines across the country as on December 31, 2019. Revenue profile is also diversified across businesses, products, and geographies, augmenting its strong overall market position. The bank has a strong franchise in the large and mid-size corporate banking segments.
 
* Adequate capitalisation
The bank has adequate capitalisation, underpinned by its sizeable networth of Rs 44,061 crore as on December 31, 2019; Tier I capital and overall CAR stood at 11.05% and 13.86%, respectively. However, given asset quality pressure, the networth coverage for net NPAs stood at 2.1 times. GoI infused Rs 4,865 crore and Rs 6,571 crore as equity capital in the bank in fiscals 2018 and 2020, respectively.
 
Weaknesses
* Modest asset quality
The bank has modest asset quality, with gross NPAs of 8.4% as on December 31, 2019 (8.8% as on March 31, 2019). Slippages for the bank have decreased over last couple of quarters, with annualised slippage ratio of 3.5% during the nine months ended December 31, 2019, as against 4.1% in fiscal 2019. The slippages were primarily from the bank's large corporate exposure to vulnerable sectors such as iron and steel, infrastructure and construction, and financial sector companies.  Its micro and small enterprises exposure also experienced elevated levels of stress. However, with the bank's focus on recoveries, including through the Insolvency and Bankruptcy Code route, gross NPAs have been declining over last few quarters. Nevertheless, the asset quality is expected to be under pressure with uptick in delinquencies expected owing to the Covid-19 pandemic.
 
* Average earnings profile
Canara Bank's earnings profile has been restricted over the last few years due to high provisioning costs, pressure on net interest margins, and subdued growth in the loan book.  Thus, return of assets (RoA) was -0.7% in fiscal 2018 and 0.1% in fiscal 2019. In absolute terms, Canara Bank reported loss of Rs 4,222 crore in fiscal 2018 and marginal profit after tax (PAT) of Rs 347 crore in fiscal 2019. For the nine months ended December 31, 2019, profit was Rs 1,024 crore, with annualised RoA of 0.2%.
 
With pressure on asset quality, Canara Bank's credit cost was 1.1% (annualised) for the nine months ended December 31, 2019 (2.0% in fiscal 2019). Provisioning coverage ratio (excluding technical write-offs) remained flat at 41.8% as on December 31, 2019, compared to 41.5% as on March 31, 2019; it remains lower than the industry average. Low provisioning coverage ratio makes its earnings susceptible to rise in provisioning costs. Margins also remain constrained at 1.9% for the nine months ended December 31, 2019 (annualised; 2.2% for fiscal 2019). 
 
The bank's ability to manage asset quality deterioration, the resultant provisioning costs and, thereby, the impact on profitability will remain a key rating monitorable over the medium term.
Liquidity

Liquidity continues to be superior, supported by a sizeable retail deposit base that forms a significant part of the total deposits. Liquidity coverage ratio was 128.58% as on December 31, 2019, against the regulatory requirement of 100% from January 1, 2019. The excess statutory liquidity ratio was Rs 46,339 crore (7.89%) as on December 31, 2019. 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
Downward factors
* Higher-than-expected deterioration in asset quality, thereby impacting earnings profile
* Decline in CAR below minimum regulatory requirements (including CCB, which is Tier I of 8.875% and overall CAR of 10.875% as on March 31, 2020)

About the Company

Canara Bank is one of the larger PSBs by assets and has a pan-India presence, with a network of 6,328 branches as on December 31, 2019. Besides banking, it undertakes factoring, asset management, insurance, and retail and institutional broking services through its subsidiaries and associates. Its overseas advances account for around 6% of the total advances with operations spread across seven countries.
 
Canara Bank reported profit of Rs 347 crore on total income (net of interest expense) of Rs 21,053 crore for fiscal 2019, as against loss of Rs 4,222 crore and Rs 19,106 crore, respectively, for fiscal 2018. For the nine months ended December 31, 2019, the bank reported PAT of Rs 1,024 crore on total income (net of interest expense) of Rs 15,444 crore, as against Rs 899 crore and Rs 15,691 crore, respectively, for the corresponding period in the previous fiscal.

Key Financial Indicators (Canara Bank - standalone)
As on / for the period ended December 31, 2019 2018
Total assets Rs crore 7,18,093 6,72,130
Total income (net of interest expense) Rs crore 5,444 15,691
PAT Rs crore 1,024 8,99
Gross NPA % 8.4 10.3
Overall CAR % 13.9 12.2
Return on assets (annualised) % 0.2 0.2
Key Financial Indicators (Canara Bank - consolidated)
As on / for the period ended December 31, 2019 2018
Total assets Rs crore   7,36,730 6,87,531
Total income(net of interest expense) Rs crore 19,186 18,452
PAT Rs crore 1,186 1,028
Gross NPA % 8.4 10.3
Overall CAR % 14.0 12.3
Return on assets (annualised) % 0.2 0.2

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.
reported
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs.cr) Rating assigned with outlook
INE476A08068 Tier I Bonds (under Basel III) 13-Dec-16 8.60% Perpetual 1000 CRISIL AA/Watch Developing
NA Tier I Bonds (under Basel III)^ NA NA NA 1500 CRISIL AA/Watch Developing
INE476A09264 Tier II Bonds (under Basel III) 31-Dec-15 8.40% 31-Dec-25 1500 CRISIL AAA/Watch Developing
INE476A08043 Tier II Bonds (under Basel III) 07-Jan-16 8.40% 07-Jan-26 900 CRISIL AAA/Watch Developing
INE476A08050 Tier II Bonds (under Basel III) 27-Apr-16 8.40% 27-Apr-26 3000 CRISIL AAA/Watch Developing
INE476A09249 Tier II Bonds (under Basel III) 03-Jan-14 9.73% 03-Jan-24 1500 CRISIL AAA/Watch Developing
INE476A09256 Tier II Bonds (under Basel III) 27-Mar-14 9.70% 27-Mar-24 1000 CRISIL AAA/Watch Developing
INE476A09231 Upper Tier II bonds (under Basel II) 29-Sep-10 8.62% 29-Sep-25 1000 CRISIL AAA/Watch Developing
INE476A09223 Tier I perpetual bonds (under Basel II) 03-Aug-10 9.05% Perpetual 749.3 CRISIL AAA/Watch Developing
NA Certificate of Deposit NA NA 7-365 days 30000 CRISIL A1+
INE667A08062 Tier I Bonds (Under Basel III)* 30-Mar-16 11.25 Perpetual 370.00 CRISIL AA/Watch Developing
INE667A08054 Tier I Bonds (Under Basel III)* 30-Mar-16 11.25 Perpetual 500.00 CRISIL AA/Watch Developing
INE667A08070 Tier I Bonds (Under Basel III)* 15-Jul-16 11.25 Perpetual 930.00 CRISIL AA/Watch Developing
INE667A08088 Tier I Bonds (Under Basel III)* 24-Oct-16 9.95 Perpetual 1,000.00 CRISIL AA/Watch Developing
INE667A08104 Tier I Bonds (Under Basel III)* 25-Jul-17 9.80 Perpetual 450.00 CRISIL AA/Watch Developing
INE667A08021 Tier II Bonds (Under Basel III)* 23-Mar-15 8.75 23-Mar-25 400.00 CRISIL AAA/Watch Developing
INE667A08096 Tier II Bonds (Under Basel III)* 03-May-17 8 03-May-27 500.00 CRISIL AAA/Watch Developing
INE667A08039 Tier II Bonds (Under Basel III)* 28-Sep-15 8.58 28-Sep-25 1,000.00 CRISIL AAA/Watch Developing
INE667A08013 Tier II Bonds (Under Basel III)* 02-Dec-14 8.95 02-Dec-24 750.00 CRISIL AAA/Watch Developing
INE667A08047 Tier II Bonds (Under Basel III)* 18-Dec-15 8.62 18-Dec-25 750.00 CRISIL AAA/Watch Developing
INE667A09177 Lower Tier II Bonds (under Basel II)* 31-Dec-12 9.00 31-Dec-22 1000.00 CRISIL AAA/Watch Developing
^yet to be issued
*Originally issued by erstwhile Syndicate Bank
 
Annexure - List of entities consolidated
Entity consolidated Extent of consolidation Rationale for consolidation
Canbank Venture Capital Fund Ltd. Full Subsidiary
Canbank Financial Services Ltd. Full Subsidiary
Canara Bank Securities Ltd. Full Subsidiary
Canbank Factors Ltd. Full Subsidiary
Canbank Computer Services Ltd. Full Subsidiary
Canara Robeco Asset Management Company Ltd. Full Subsidiary
Canara HSBC Oriental Bank of Commerce Life Insurance Company Ltd. Full Subsidiary
Canara Bank(Tanzania) Ltd. Full Subsidiary
Canfin Homes Ltd. Proportionate Associate
Karnataka Gramin Bank Proportionate Associate
Kerala Gramin Bank Proportionate Associate
Commercial Inda Bank LLC Proportionate Joint Venture
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Certificate of Deposits  ST  30000.00  CRISIL A1+      20-12-19  CRISIL A1+      08-09-17  CRISIL A1+  CRISIL A1+ 
            05-09-19  CRISIL A1+           
            27-03-19  CRISIL A1+           
            29-01-19  CRISIL A1+           
Lower Tier-II Bonds (under Basel II)  LT  1000.00
03-06-20  		CRISIL AAA/(Watch) Developing    --  27-03-19  Withdrawal  25-01-18  CRISIL AAA/Stable  08-09-17  CRISIL AAA/Negative  CRISIL AAA/Negative 
            29-01-19  CRISIL AAA/Stable           
Perpetual Tier-I Bonds (under Basel II)  LT  749.30
03-06-20  		CRISIL AAA/(Watch) Developing      20-12-19  CRISIL AAA/Watch Developing  25-01-18  CRISIL AAA/Stable  08-09-17  CRISIL AAA/Negative  CRISIL AAA/Negative 
            05-09-19  CRISIL AAA/Stable           
            27-03-19  CRISIL AAA/Stable           
            29-01-19  CRISIL AAA/Stable           
Tier I Bonds (Under Basel III)  LT  4250.00
03-06-20  		CRISIL AA/(Watch) Developing      20-12-19  CRISIL AA/Watch Developing  25-01-18  CRISIL AA/Negative  08-09-17  CRISIL AA/Negative  CRISIL AA/Negative 
            05-09-19  CRISIL AA/Stable           
            27-03-19  CRISIL AA/Stable           
            29-01-19  CRISIL AA/Stable           
Tier II Bonds (Under Basel III)  LT  11300.00
03-06-20  		CRISIL AAA/(Watch) Developing      20-12-19  CRISIL AAA/Watch Developing  25-01-18  CRISIL AAA/Stable  08-09-17  CRISIL AAA/Negative  CRISIL AAA/Negative 
            05-09-19  CRISIL AAA/Stable           
            27-03-19  CRISIL AAA/Stable           
            29-01-19  CRISIL AAA/Stable           
Upper Tier-II Bonds (under Basel II)  LT  1000.00
03-06-20  		CRISIL AAA/(Watch) Developing      20-12-19  CRISIL AAA/Watch Developing  25-01-18  CRISIL AAA/Stable  08-09-17  CRISIL AAA/Negative  CRISIL AAA/Negative 
            05-09-19  CRISIL AAA/Stable           
            27-03-19  CRISIL AAA/Stable           
            29-01-19  CRISIL AAA/Stable           
All amounts are in Rs.Cr.
Links to related criteria
Rating Criteria for Banks and Financial Institutions
CRISILs Criteria for Consolidation
Criteria for Notching up Stand Alone Ratings of Entities Based on Government Support
Rating criteria for Basel III - compliant non-equity capital instruments

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