Rating Rationale

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 been allocated Rs 3045 crore out of this for the current fiscal.

* Adequate capitalisation
Dena Bank has adequate capitalisation, driven by continued government support. Tier-I and overall capital adequacy ratios (under Basel III) were 8.8% and 11.3%, respectively, as on September 30, 2017 (9.1% and 11.4%, respectively, as on March 31, 2017). Capitalisation has been supported by equity infusion of Rs 2832 crore by GoI between fiscals 2011 and 2017. Additionally, the bank raised equity capital of Rs 257.19 crore through Life Insurance Corporation of India and General Insurance Corporation of India over the past two years. The networth coverage for net non-performing assets (NPAs) remained at 1.0 time as on September 30, 2017, the same as on March 31, 2017, although it declined from 2.0 times as on March 31, 2015, because of deterioration in asset quality, and was lower than the industry average. 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 17.23% as on September 30, 2017, from 16.3% as on March 31, 2017, and 10.0% as on March 31, 2016. The increase in gross NPAs was because of slippages in the large- and mid-corporate loan book given the weak economic environment. While slippages to NPA ratio in the first half of fiscal 2018 decreased to 5.0% (on an annualised basis; as a percentage of net opening advances) compared to 8.2% in fiscal 2017, they remained high. Outstanding restructured standard advances stood at Rs 3462 crore as on March 31, 2017, constituting 4.5% of gross advances (Rs 4822 crore, constituting 5.6% of gross advances as on March 31, 2016), while standard accounts under Sustainable Structuring of Stressed Assets (S4A) and Strategic Debt Restructuring (SDR) stood at Rs.527 crore and Rs 3688 crore respectively. Asset quality remains vulnerable to further slippages to NPAs, given the challenging macroeconomic environment and the sizeable exposure to vulnerable sectors. The bank's ability to contain deterioration in its asset quality, and hence profitability, 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 864 crore (Return on assets of '0.66%) for fiscal 2017, primarily on account of high provisioning costs of 2.0% of average assets. Losses continued in the first half of fiscal 2018, with continued high provisioning cost of around 2.0% (annualised). With relatively modest net interest margin of 2.0% (annualised) for the first half of fiscal 2018, provisioning costs will remain the key determinant of profitability. Credit costs are expected to remain high over the next few quarters, given the lower-than-industry-average provision coverage ratio (excluding technical write-off) of 43.1% as on September 30, 2017 (38.7% as on March 31, 2017) and increasing provisioning requirements on stressed assets. 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.

Outlook: Stable (Lower Tier-II bonds (under Basel II) and Tier-I Perpetual Bonds (under Basel II))
CRISIL believes that Dena Bank will continue to benefit from strong support from GoI, especially given the recent recapitalisation announcement. The bank's asset quality and earnings profile are however, expected to remain under pressure over the medium term.

Upside scenario:
* Substantial and sustained improvement in the bank's asset quality and earnings profile.

Downside scenario:
* Further significant deterioration in its asset quality or earnings profile.

Outlook: Negative (Tier-I Bonds (under Basel III))
CRISIL believes that the expected stress in Dena Bank's asset quality and earnings profile over the medium term would impact the bank's eligible reserves position.

Downside scenario:
* The rating may be downgraded in case of deterioration in eligible reserves position. The rating may also be downgraded if there is further significant deterioration in its asset quality or earnings profile.

Upside scenario:
* CRISIL is evaluating the flexibility with banks to set off any accumulated losses with the bank's balance in share premium account. Clarity on the same is likely to have positive implication on the availability of eligible reserves to service AT1 coupon payments and thereby the rating on the instruments.