Rating Rationale
January 11, 2019 | Mumbai
Dena Bank
Ratings on Lower Tier-II Bonds and Tier-I Perpetual Bonds (Under Basel II) placed on 'Watch Positive' 
 
Rating Action
Lower Tier-II Bonds Aggregating Rs.1456 Crore (Under Basel II) CRISIL AA- (Placed on 'Rating Watch with Positive Implications)
Tier-I Perpetual Bonds Aggregating Rs.250 Crore (Under Basel II) CRISIL A+ (Placed on 'Rating Watch with Positive Implications)
Rs.400 Crore Tier I Bonds (Under Basel III)  CRISIL A-/Negative (Withdrawn)
Rs.10000 Crore  Certificates of Deposit Programme CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has placed its ratings on the Lower Tier II Bonds (under Basel II) and Tier I Perpetual Bonds (under Basel II) of Dena Bank on 'Rating Watch with Positive Implications'. The rating on the Certificates of Deposits programme has been reaffirmed at 'CRISIL A1+'. The rating on the Tier I Bonds (under Basel III) has been withdrawn as the instruments have been redeemed. The withdrawal is in line with CRISIL's policy.

On September 17, 2018, the Ministry of Finance announced that the Alternative Mechanism1 (AM) after consultation with the Reserve Bank of India (RBI), had decided that Bank of Baroda (BoB), Vijaya Bank, and Dena Bank may consider amalgamation of the three Banks. Given that the amalgamation plan was at a nascent stage and subject to pending board and regulatory approvals, CRISIL had not taken any rating action.

The ratings on the Lower Tier II Bonds (under Basel II) and Tier I Perpetual Bonds (under Basel II) have now been placed on 'Watch with Positive Implications' as there has been significant progress on the amalgamation and the credit profile of the merged entity would be similar to that of BoB , which is a credit positive for the debt instruments of Dena Bank. On January 2, 2019, the boards of Dena Bank and BoB, approved the Fair Equity Exchange Ratio (subject to statutory/ regulatory approvals) of 110 equity shares of Rs.2 each of Bank of Baroda for every 1000 equity shares of Rs.10 each of Dena Bank.

In terms of proforma merged financials, BoB will constitute around 70% of total assets or gross advances or deposits of the merged bank, and therefore, the key performance metrics of the merged entity would be similar to that of BoB. Based on September 30, 2018 numbers, the merged entity would have total assets of Rs 10,44,234 crore, gross non-performing assets (NPAs) of 12.41% and Tier I and overall Capital Adequacy Ratio (CAR) of 10.14% and 11.97% respectively. On the business side, there are potential synergies stemming from a larger distribution network with deeper penetration in key states and operational efficiencies. The global network strength of BoB can be leveraged to provide global access to customers of Vijaya Bank and Dena Bank too. Success would depend on how potential challenges of manpower integration and leveraging of business and operational synergies are handled.

Till the transaction is consummated, the ratings on the debt instruments of Dena Bank will continue to factor in the expectation of strong support from majority owner, Government of India, and adequate capitalisation given the restriction on growth. The ratings also factor in the stress on Dena Bank's asset quality, especially in the corporate portfolio, and the resultant increase in provisions that would continue to impact profitability over the medium term.  The bank's gross NPA ratio remained high at 23.64% as on September, 2018 (22.04% as on March 31, 2018). Also, profitability is modest with the bank reporting a return on assets (RoA) of -1.9% (annualised) for the period ended September 2018 (-1.5% for fiscal 2018). 

Analytical Approach

The ratings on Dena Bank's debt instruments will continue to factor in the strong support expected from its majority owner, the Government of India (GoI) till the transaction is consummated and the bank ceases to exist. 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 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.

Key Rating Drivers & Detailed Description
Strengths
* Expectation of strong support from majority owner, Government of India (GoI)
The rating continues to factor in an 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 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. CRISIL believes that the majority ownership creates a moral obligation on GoI to support the PSBs, including Dena Bank. As part of the 'Indradhanush' framework, government has pledged to infuse at least Rs 70,000 crore in PSBs during fiscals 2015-19, of which Rs 25,000 crore each was infused in fiscals 2016 and 2017. Further, in October 2017, the government had outlined recapitalisation package of Rs 2.11 lakh crores over fiscals 2018 and 2019, out of which PSBs will receive Rs 88,139 crore from the government in fiscal 2018. Dena Bank has received Rs Rs. 3045 crore out of this for the fiscal 2018.

* Adequate capitalisation
Dena Bank has adequate capitalisation, driven by continued government support. CET 1, Tier-I and overall CAR (under Basel III) were 7.63%, 7.63% and 10.10%, respectively, as on September 30, 2018 (8.81%, 8.81% and 11.09%, respectively, as on March 31, 2018). Capitalisation has been supported by equity infusion of Rs 5877 crore by GoI between fiscals 2011 and 2018, out which it received Rs 3045 crore in fiscal 2018. Capital ratios also benefit from the restriction on growth for the bank. The networth coverage for net non-performing assets (NPAs) remained at 1.2 time as on September 30, 2018, the same as on March 31, 2018, although it declined from 2.0 times as on March 31, 2015, because of deterioration in asset quality. However, CRISIL believes Dena Bank will maintain adequate capitalisation over the medium term, backed by expectation of continued GoI support.

Weaknesses
* Weak asset quality
Dena Bank's asset quality has deteriorated significantly over the past few quarters. Gross NPAs increased to 23.64% as on September 30, 2018, from 22.04% as on March 31, 2018, and 16.3% as on March 31, 2017. The increase in gross NPA ratios was because of additional slippages in the large- and mid-corporate loan book and also partly due to de-growth in advances. Slippages to NPA ratio in the first half of fiscal 2019 stood at 9.1% (on an annualised basis; as a percentage of net opening advances) compared to 8.3% in fiscal 2018. Asset quality remains vulnerable to further slippages to NPAs, given the sizeable exposure to vulnerable sectors. The bank's ability to contain further slippages and effect recoveries from its NPAs, remains a key monitorable.

* Weak earnings profile
Dena Bank's earnings profile has been significantly impacted by deterioration in its asset quality. The bank reported a net loss of Rs 1138 crore (Return on assets- (RoA) of '1.9%) for the first-half of fiscal 2019, primarily on account of high provisioning costs of 3.4% of average assets compared to RoA of -1.5% and provisioning cost of 3.5% in fiscal 2018. With relatively modest net interest margin of 2.5% (annualised) for the first-half of fiscal 2019, provisioning costs will remain the key determinant of profitability. The pre-provisioning profit (PPOP) for the bank has increased to Rs 441.90 crore during the quarter ended September 30, 2018 as compared Rs 259.96 crore during the quarter ended June 30, 2018. The provision coverage ratio for the bank (excluding technical write -off) stood at 57.2% as on September 30, 2018 (52.1% as on March 31, 2018).

CRISIL believes that more-than-expected deterioration in asset quality and its impact on profitability can put further pressure on the bank's credit risk profile, and remain key rating sensitivity factors.

Liquidity
The banks liquidity is comfortable supported by strong retail deposit base. The Liquidity Coverage Ratio of the bank stood at 171.02% as on September 30, 2018 as against the regulatory requirement of 90%. The bank's liquidity also benefits from access to systemic sources of funds, such as the liquidity adjustment facility from RBI and access to the call money market.
About the Bank

Dena Bank is a PSB, with total assets of Rs 114620 crore and a network of 1858 branches and 1604 automated teller machines as on September 30, 2018. Its business is largely concentrated in western India. GoI owned 80.74% of the equity share capital as on September 30, 2018.

For fiscal 2018, net loss was Rs 1923 crore on a total income (net of interest expense) of Rs 3639 crore, against a net loss of Rs 864 crore on a total income (net of interest expense) of Rs 3660 crore for the previous fiscal.

For the first half of fiscal 2019, total income (net of interest expenses) and net loss were Rs 1987 crore and Rs 1138 crore, respectively, as against a total income (net of interest expense) of Rs 1900 crore and a net loss of Rs 318 crore, for the corresponding period of the previous fiscal.

1Panel constituted by Union Government of India to evaluate proposals for consolidation of public sector banks (PSBs).

Key Financial Indicators
As on/for the period ended September 30 Unit 2018 2017
Total assets Rs crore 114620 120954
Total income Rs crore 4947 5229
Profit after tax Rs crore -1138 -318
Gross NPA % 23.64 17.2
Overall capital adequacy ratio (for banks) % 10.10 11.3
Return on assets % -1.9 -0.5

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 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)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue size (Rs.Cr) Rating Outstanding with Outlook
INE077A09062 Lower Tier II Bonds^ 25-Mar-08 9.25% 24-May-18 106 CRISIL AA-/Watch Positive
INE077A09088 Lower Tier II Bonds 29-Jan-09 9.50% 29-Jan-19 200 CRISIL AA-/Watch Positive
INE077A09070 Lower Tier II Bonds 30-Sep-08 11.20% 30-Apr-19 300 CRISIL AA-/Watch Positive
INE077A09104 Lower Tier II Bonds 25-Jun-12 9.23% 25-Jun-27 850 CRISIL AA-/Watch Positive
INE077A09054 Tier I Perpetual Bonds^ 31-Dec-07 10.05% Perpetual 125 CRISIL A+/Watch Positive
INE077A09096 Tier I Perpetual Bonds 28-May-09 9.00% Perpetual 125 CRISIL A+/Watch Positive
NA Certificate of deposits programme NA NA 7-365 days 10,000 CRISIL A1+
^CRISIL is awaiting independent confirmation of redemption before withdrawing ratings
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Certificate of Deposits  ST  10000.00  CRISIL A1+      19-09-18  CRISIL A1+  12-09-17  CRISIL A1+  20-10-16  CRISIL A1+  CRISIL A1+ 
            25-01-18  CRISIL A1+      10-03-16  CRISIL A1+   
Lower Tier-II Bonds (under Basel II)  LT  1456.00
11-01-19 		 CRISIL AA-/(Watch) Positive      19-09-18  CRISIL AA-/Stable  12-09-17  CRISIL AA-/Negative  20-10-16  CRISIL AA-/Negative  CRISIL AA+/Negative 
            25-01-18  CRISIL AA-/Stable      10-03-16  CRISIL AA-/Negative   
Perpetual Tier-I Bonds (under Basel II)  LT  250.00
11-01-19 		 CRISIL A+/(Watch) Positive      19-09-18  CRISIL A+/Stable  12-09-17  CRISIL A+/Negative  20-10-16  CRISIL A+/Negative  CRISIL AA/Negative 
            25-01-18  CRISIL A+/Stable      10-03-16  CRISIL A+/Negative   
Tier I Bonds (Under Basel III)  LT  0.00
11-01-19 		 Withdrawn      19-09-18  CRISIL A-/Negative  12-09-17  CRISIL A-/Negative  20-10-16  CRISIL A-/Negative  CRISIL AA-/Negative 
            25-01-18  CRISIL A-/Negative      10-03-16  CRISIL A-/Negative   
Upper Tier-II Bonds (under Basel II)  LT    --    --    --  12-09-17  Withdrawn  20-10-16  CRISIL A+/Negative  CRISIL AA/Negative 
                    10-03-16  CRISIL A+/Negative   
All amounts are in Rs.Cr.
Links to related criteria
CRISILs Approach to Financial Ratios
Rating Criteria for Banks and Financial Institutions
Criteria for Notching up Stand Alone Ratings of Entities Based on Government Support
Rating Criteria for Hybrid Capital instruments issued by banks under Basel II guidelines
Rating criteria for Basel III - compliant non-equity capital instruments

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