Canara Bank Ratings Reaffirmed
Rating Action
& Originally issued by erstwhile Syndicate Bank 1 crore = 10 million Refer to annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ratings on the existing debt instruments of Canara Bank at ‘CRISIL AAA/CRISIL AA+/Stable/CRISIL A1+'. The rating on Rs 450 crore Tier I bonds (under Basel III; originally issued by erstwhile Syndicate Bank) has been withdrawn given that there is no outstanding on the same, in line with CRISIL Ratings’ withdrawal policy.
The ratings continue to reflect the expectation of strong support from the majority stakeholder, the Government of India (GoI), and the healthy market position of the bank. These strengths are partially offset by the modest, albeit improving, asset quality and earnings profile.
On September 28, 2021, CRISIL Ratings had upgraded its rating on the Tier I bonds (under Basel III) of Canara Bank to ‘CRISIL AA+/Stable’ from ‘CRISIL AA/Stable’ and reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the Tier II Bonds (under Basel III) and Lower Tier II bonds (under Basel II), and the short-term rating on the certificate of deposit. The upgrade in the rating of Tier I bonds (under Basel III) factored in the improved position of Canara Bank to make future coupon payments, supported by proposed adjustment of accumulated losses with share premium account, and the improved capital ratios of the bank.
The rating on the Tier I bonds (under Basel III) meets 'CRISIL's rating criteria for BASEL III-compliant instruments of banks'. CRISIL Ratings evaluates the bank's (i) reserves position (adjusted for any medium-term stress in profitability) and (ii) cushion over regulatory minimum Common Equity Tier I (CET1; including Capital Conservation Buffer—CCB) capital ratios. Also evaluated is the demonstrated track record and management philosophy regarding maintenance of sufficient CET1 capital cushion above the minimum regulatory requirement.
Under the schemes announced by the Reserve Bank of India (RBI) on January 1, 2019, February 11, 2020, August 6, 2020, May 5, 2021, and the resolution framework for stressed accounts, Canara Bank had 2.6% of advances restructured as on March 31, 2022. Nevertheless, the impact of any fourth wave, if and when, on the collections and delinquencies will be a key monitorable. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of Canara Bank and its subsidiaries and associates. This is because of majority shareholding, business and financial linkages and shared brand. CRISIL Ratings has also factored in the strong support the bank is expected to receive from its majority shareholder, the GoI, on an ongoing basis and in the event of distress.
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:
The ratings continue to factor in the expectation of strong government support, both on an ongoing basis, and in the event of distress. This is because GoI is a majority shareholder in public sector banks (PSBs) and the guardian of India's financial system. While the shareholding of GoI declined to 62.93% as on June 30, 2022 from 78.55% as on September 30, 2020 post the Rs 2000 crore qualified institutional placement (QIP) in December 2020 and Rs 2,500 crore QIP in August 2021, it remains the majority shareholder. Stability of the banking sector is of prime importance to the government given its criticality to the economy, strong public perception of sovereign backing for PSBs and severe implications of any PSB failure in terms of political fallout, systemic stability and investor confidence. The majority ownership creates a moral obligation on GoI to support PSBs, including Canara Bank.
The bank had a networth of Rs 50,681 crore as on June 30, 2022 (Rs 66,111 crore as on March 31, 2022), also supported by Rs 2,000 crore equity raised by the bank via QIP during fiscal 2021 and Rs 2,500 crore equity raised in fiscal 2022. CET1, Tier-I capital adequacy ratio (CAR) and overall CAR stood at 10.5%, 12.1% and 14.9%, respectively, on June 30, 2022 (10.3%, 11.9% and 14.9%, respectively, as on March 31, 2022).
Canara Bank is one of India's larger PSBs, with total advances and deposits of Rs 7.83 lakh crore and Rs 11.18 lakh crore, respectively, as on June 30, 2022. The merger of eSyndicate Bank has also strengthened the market position of the bank. It had a market share of more than 6% in advances and deposits as on June 30, 2022. It has a pan-India branch presence, with around 9,732 domestic branches and 10,802 automated teller machines (ATMs) across the country on the same date. It also has overseas branches at three locations. Revenue is diversified across businesses, products and geographies, augmenting the strong overall market position. The bank has a robust franchise in the large and mid-size corporate banking segments.
Weakness:
The asset quality of the bank, with gross non-performing assets (NPAs) of 6.98% as on June 30, 2022 (7.51% as on March 31, 2022 and 8.93% as on March 31, 2021) remains modest, albeit with an improving trend. Slippages for the bank were high, at Rs 24,107 crore during fiscal 2020 and Rs 27,072 crore during fiscal 2019. These were primarily from the bank’s large corporate exposure to companies in vulnerable sectors, such as iron and steel, infrastructure and construction and finance. Its micro and small enterprises exposure has also experienced elevated levels of stress. The slippages were lower for fiscal 2021 at Rs 17,885 crore and further reduced to Rs 12,707 crore for fiscal 2022. Slippages for the first quarter of fiscal 2023 were Rs 3,949 crore. The reduced slippages and hence the asset quality has also been supported by various schemes launched by the GoI and RBI, such as Emergency Credit Line Guarantee Scheme, which has benefitted the micro, small and medium enterprises (MSMEs). The restructuring schemes have also benefitted the reported NPA metrics. Canara Bank had restructured portfolio of around 2.6% of its advances as on March 31, 2022.
The traction in the slippages, especially in the current challenging macro environment, will continue to be monitored. Nevertheless, with the bank’s focus on recoveries, also supported by recoveries through the Insolvency and Bankruptcy Code route, gross NPAs have seen an improving trend. Gross NPAs from the corporate segment stood at around 8.9%, followed by MSMEs (11.0%), agriculture (4.6%) and retail (1.4%) as on June 30, 2022.
While the earnings profile of the bank has been impacted over the last few years primarily because of high credit costs, the same has also seen an improvement since fiscal 2021. As against substantial losses incurred over the last couple of years (loss of Rs 5839 crore reported for fiscal 2020), the bank reported profit after tax (PAT) of Rs 2,558 crore during fiscal 2021; Rs 5678 crore for fiscal 2022 and Rs 2022 crore in the first quarter of fiscal 2023. Nevertheless, the earnings profile remains modest, constrained by the lower proportion of current account savings account deposits impacting net interest margin and the pre-provisioning operating profit of the bank. Further, the provisioning coverage ratio (excluding technical write-offs) while increased substantially to 66.2% as on June 30, 2022 (66.5% as on March 31, 2022, and 56.2% as on March 31, 2020) remains moderate.
Nevertheless, CRISIL Ratings will continue to monitor the traction in asset quality and its consequent impact on profitability, given the challenging macro environment. |
Liquidity: Superior Liquidity continues to be superior, supported by sizeable retail deposit base that forms a significant part of the total deposits. Liquidity coverage ratio was 134.9% as on June 30, 2022 as against the regulatory requirement of 100%. Liquidity also benefits from access to systemic sources of funds, such as the liquidity adjustment facility from RBI, access to the call money market and refinance limits from sources such as the National Housing Bank and National Bank for Agriculture and Rural Development.
ESG Profile CRISIL Ratings believes Canara Bank’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.
The ESG profile for financial sector entities typically factors in governance as a key differentiator. The sector has reasonable social impact because of its substantial employee and customer base and can play a key role in promoting financial inclusion. While the sector does not have direct adverse environmental impact, the lending decisions may have a bearing on the environment.
Canara Bank has an ongoing focus on strengthening the various aspects of its ESG profile.
Canara Bank’s key ESG highlights:
There is growing importance of ESG among investors and lenders. Canara Bank’s commitment to ESG will play a key role in enhancing stakeholder confidence, given shareholding by foreign portfolio investors and access to domestic capital markets. |
Outlook: Stable Canara Bank should continue to benefit from the strong government support, and have a healthy market share. |
Rating Sensitivity factors Downward factors
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About the Bank Set up in 1906, Canara Bank is a one of the larger PSBs. It made its initial public offering in 2002. As on March 31, 2022, GoI's ownership in the bank stood at 62.93%.
Amalgamation of eSyndicate Bank into Canara Bank was effective from April 1, 2020. Following the amalgamation, the merged entity enjoys the benefits of larger balance sheet size, optimised capital utilisation and wider geographic reach, leading to deeper penetration. Canara Bank has a strong domestic branch network, comprising 9,732 branches and 10,802 ATMs. Additionally, it has international presence via three overseas branches (New York, London, Hong Kong and Dubai).
Besides banking, it undertakes factoring, asset management, insurance and retail and institutional broking services through its subsidiaries and associates. |
Key Financial Indicators
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Any other information: Not Applicable
Note on Tier II instruments (under Basel III) The distinguishing feature of tier II capital instruments under Basel III 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 RBI. CRISIL Ratings 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 non-equity Tier 1 capital instruments (Under Basel III) The distinguishing features of non-equity tier I capital instruments (under Basel III) are the existence of coupon discretion at all times, high capital thresholds for likely coupon non-payment, and principal write-down (on breach of a pre-specified trigger). These features increase the risk attributes of non-equity tier I instruments over those of tier II instruments under Basel III, and capital instruments under Basel II. To factor in these risks, CRISIL Ratings notches down the rating on these instruments from the corporate credit rating of the bank.
The factors that could trigger a default event for non-equity tier I capital instruments (under Basel III), resulting in non-payment of coupon, are: i) the bank exercising coupon discretion; ii) inadequacy of eligible reserves to honor coupon payment if the bank reports a loss or low profit; or iii) the bank breaching the minimum regulatory CET I (including CCB) ratio. Moreover, given the additional risk attributes, the rating transition for non-equity tier I capital instruments (under Basel III) can potentially be higher and faster than that for tier II instruments.
Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of outstanding Instrument(s)
^yet to be issued *Originally issued by erstwhile Syndicate Bank
Annexure - Details of rating withdrawn
*Originally issued by erstwhile Syndicate Bank |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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