Key Rating Drivers & Detailed Description
Strengths:
* Strong expectation of support from GoI
The rating factors in an expectation of strong support from LIC and GoI, both on an ongoing basis and in the event of distress. LIC had, on January 21, 2019, completed acquisition of 51% controlling stake in IDBI Bank, infusing total capital of Rs 21624 crore in the bank. In September 2019, the Bank further received capital infusion of Rs 9,300 crore by LIC and GoI which helped it improve the capital ratios and bring it back above the regulatory requirement. Post the acquisition, GoI stake stood at 47.11%. The bank last raised capital in Q3 of fiscal 2021 of around Rs 1435 crores in which LIC/GoI did not participate. As on December 31, 2021, the stake of LIC stood at 49.24% and that of Government of India stood at 45.48%. Despite the same, the combined shareholding between LIC and GOI continues to remain above 90%. Given that LIC is a 100% GoI-owned entity and has supported the GoI in its recapitalisation programmes for public sector banks in the past, CRISIL Ratings believes that GoI will continue to be involved in matters relating to IDBI Bank. 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 banks with high GoI holding, and the severe implications of any failure in terms of political fallout, systemic stability, and investor confidence.
During the previous Union Budgets, the Finance Minister had announced that GoI proposes to sell its balance stake in IDBI Bank to private, retail and institutional investors through the stock exchange. However, CRISIL Ratings notes that the formal details for the stake sale transaction are yet to be announced. CRISIL Ratings will await this announcement, clarity on the modalities and timelines and details of the prospective investors. Hence, the stance and role of both GoI and LIC in the Bank, post stake sale by GoI, will also be a critical aspect to be evaluated. CRISIL Ratings will continue to closely monitor the developments and its impact on the outstanding ratings of the Bank and take appropriate need-based rating action thereafter.
* Stable deposit profile
The bank has a stable deposit profile marked by high CASA ratio and low average cost of deposits. As on December 31, 2021, the overall deposit base stood at Rs 222,578 crores. as on December 31, 2021, as against Rs 230,898 crores as on March 31, 2021. However, the decline of 3.6% is primarily due to a focused reduction in reliance on bulk deposits. Excluding the same, retail deposits and CASA registered an increase of 2.9% during the same period. The share of CASA deposits continues to remain high increasing to 54.7% as on December 31, 2021, as compared to 50.5% as on March 31, 2021 (47.7% as on March 31, 2020). The cost of deposits too for the bank has been on a declining trend partly attributable to the shift from bulk deposits to retail and CASA deposits over the years. The average cost of deposits improved to 3.6% for 9 months of fiscal 2022 as against 4.3% for fiscal 2021 (5.1% for fiscal 2020).
* Established market position, supported by a large asset base
The bank had an asset base of Rs 291,249 crore as on December 31, 2021. Gross Advances of Rs 167,317 crore accounted for around 1.0-1.5% of the banking system advances. While the overall gross advances have been de-growing over the past few quarters, it is still among one of the large banks in India. Within the advances book, bank has reduced its corporate book exposure and increased its share of retail advances. As on December 31, 2021, share of retail book (comprising of retail assets, agriculture and MSME) stood at 63% compared to 56% as on March 31, 2020 (51% as on March 31, 2019). Within retail assets, around 74% comprises of home-loans as on December 31, 2021.
Weakness:
* Weak asset quality metrics; expected to improve going forward
Over the past five years, the bank had faced multitude of challenges which started with a spike in GNPA. reaching 21.3% as on March 31, 2017, from 5.9% as on March 31, 2015. The GNPA metrics peaked at 27.9% as on March 31, 2018. Since then, the bank has been working on cleaning up its balance sheet and recognizing as well as providing for the GNPAs adequately. While the reported GNPAs continue to remain elevated at 20.6% as on December 31, 2021 (22.4% as on March 31, 2021), the incremental slippages and stress in the book is limited. Slippages have been subdued over the last two years. Slippage ratio was at 1.9% for fiscal 2021 and 2.8% for nine months of fiscal 2022. In comparison, the slippage ratio for fiscal 2019 and fiscal 2020 was at 10.6% and 6.4% respectively.
The overall restructured book stood at 3.1% of gross advances as on December 31, 2021. The total SMA 1 and 2 accounts for the bank stood at Rs 2403 crore as on December 31, 2021, around 1.4% of the total gross advances. This has reduced from Rs 4087 crore (2.5% of total gross advances) as on March 31, 2021.
CRISIL Ratings notes that ~91% of the GNPA has 100% provision. Consequently, resolution of these accounts under NCLT process or transfer of these accounts post operationalization of the newly created National Asset Reconstruction Company Ltd may see a sharp drop in reported GNPAs. Overall, the ability of the bank to control slippages as the Bank restarts corporate lending remains a key monitorable going forward.
* Moderate earnings profile
The earnings profile has been marked by net losses over the past five years as the bank significantly ramped up provisioning for GNPAs. The Bank reported profit after tax in fiscal 2021 and also for the nine months ended December 31, 2021. But the profitability has been partly supported by recovery from written off accounts and tax refunds.
Additionally, over the last few years, the Bank had reported de-growth in advances (as it remained under PCA framework) while deposits steadily increased. Consequently the net advances to deposit ratio of the Bank had been on a declining trend. It stood at 56% as on March 2021 as compared to 69% as on March 2018. This kept net interest margins (NIMs) subdued.
However, over the last 18 months, the core operating profitability is now an improving trend on the back of lower cost of funds and improving yield as the share of retail book increases. Coupled with steady recovery from written-off accounts, the NIMs (including other income) has improved. NIM increased from 2.6% in fiscal 2020 to 3.4% in fiscal 2021 and further to 3.7% for the nine months of fiscal 2022.
In terms of credit costs, CRISIL Ratings believes that incremental provisions are likely to be lower for the bank as slippages have reduced significantly. For legacy GNPAs, the bank has substantially ramped up on its provision coverage ratio taking the same to almost 97% as on December 31, 2021. Even for the accounts admitted under NCLT, the bank has provided in full for the accounts admitted under the RBIs NCLT 1 and 2 list and for the other cases. With expectations of some recoveries on accounts admitted under NCLT, there could be write backs for the bank going forward which would support the earnings profile. Credit costs stood at around 0.6% for the nine months ended December 31, 2021 as against 1.4% for fiscal 2021, 6.6% for fiscal 2020 and 13.2% for fiscal 2019. CRISIL Ratings expects the earnings profile to improve going forward on the back of controlled credit costs. However, structural improvement in earnings will be linked to the ability to restart lending and improve credit to deposit ratio.