Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/CRISIL AA+/Stable/CRISIL A1+’ ratings on various debt instruments of Indian Bank.

 

The overall ratings continue to factor in expectation of strong support Indian Bank is likely to receive from its majority owner, GoI, and the sizeable scale of operations. It also factors in a healthy resource profile, with a high proportion of current and savings account (CASA) deposits and adequate capitalisation. These strengths are partially offset by modest, albeit improving, asset quality and earnings profile.

 

On October 01, 2021, CRISIL Ratings had upgraded the rating of Tier I bonds (under Basel III) on account of the improved position of Indian Bank to make future coupon payments, supported by adjustment of accumulated losses with share premium account, and the bank’s improved capital ratios. Pursuant to the adjustment, the eligible reserves to total assets ratio for the bank will improve. Additionally, vide the Department of Financial Services Gazette notification no. CG-DL-E-23032020-218862 (S.O. 1200 E) dated 23.03.2020 referred to as Nationalised Banks (Management and Miscellaneous Provisions) Amendment Scheme, 2020, the bank still has share premium reserves which can be utilised to set off any losses in future, and this supports the credit profile of the Tier I (under Basel III) instruments. Other public sector banks (PSBs) have also utilised this provision. However, any substantial depletion of the share premium account or any regulatory changes to appropriation of the share premium account pertaining to adjustment of accumulated losses are key monitorable.

 

Supported by the regular capital infusion by the Government of India (GoI), equity raised via qualified institutional placements (QIP) and improved accruals, Indian Bank’s capital ratios have improved, as reflected in tier 1 and overall capital to risk-weighted adequacy ratio (CRAR) of 12.03% and 15.47%, respectively, as on December 31, 2021 (11.93% and 15.71%, respectively, as on March 31, 2021).

 

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 CET1 (including CCB) capital ratios. Also evaluated is the demonstrated track record and management philosophy regarding maintenance of sufficient CET1 capital cushion above the minimum regulatory requirements.

 

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 bank's corporate credit rating.

 

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 honour coupon payment if the bank reports a loss or low profit; or iii) the bank breaching the minimum regulatory Common Equity Tier I (CET I; including the Capital Conservation Buffer) 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.

 

In-line with the relief measures announced by the Reserve Bank of India (RBI) during the Covid-19 pandemic, Indian Bank had provided moratorium to its borrowers. Though collections declined during the initial months of the first wave, they improved subsequently. However, the second wave of the pandemic led to intermittent lockdowns and localised restrictions, thus impacting collections once again. Although the impact has been moderate during this phase, any adverse change in payment discipline of borrowers may lead to higher delinquencies.

 

Under the scheme announced by the RBI dated January 1, 2019, February 11, 2020 and August 6, 2020, and the resolution framework for stressed accounts, Indian bank had restructured 1.13% of gross advances as on December 31, 2021. Pursuant to RBI’s resolution framework 2.0 in May 2021, restructuring stands at 3.95% of gross advances. Nevertheless, the ability of the bank to manage collections and asset quality going forward this fiscal, is a key monitorable. Going forward too, the impact of the third wave of the pandemic, if and when it comes in terms of its spread, intensity and duration, will also be closely monitored.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of Indian Bank and its subsidiaries and associates because of majority shareholding, business and financial linkages and shared brand. CRISIL Ratings has also factored in the strong support the bank is likely to receive from GoI on an ongoing basis and in case of distress.

 

Please refer to 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

The rating continues to factor in expectation of strong government support. This is because GoI is the majority shareholder in public sector banks (PSBs) and the guardian of India's financial system. 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 Indian Bank. Any material change in shareholding by GoI and/or privatisation of the bank in line with announcement by the Finance Minister in the recent budget for privatisation of two PSBs will be key rating sensitivity factors.

 
As part of the Indradhanush framework, GoI had pledged to infuse at least Rs 70,000 crore in PSBs over fiscals 2015-2019, of which Rs 25,000 crore each was infused in fiscals 2016 and 2017. In October 2017, the government outlined a recapitalisation package of Rs 2.11 lakh crore over fiscals 2018-2019; Indian Bank and eAllahabad Bank together received Rs 1,500 crore in fiscal 2018 and Rs 11,740 crore in fiscal 2019 under this package. Also, GoI allocated Rs 70,000 crore in fiscal 2020, of which Rs 4,687 crore was received.

 

* Adequate capitalisation

Capitalisation of the bank is adequate, with Common Equity Tier-1 (CET 1) ratio, Tier-I capital adequacy ratio (CAR) and overall CAR at 11.38%, 12.03% and 15.47%, respectively, as on December 31, 2021 (11.27%, 11.93% and 15.71%, respectively, as on March 31, 2021). The bank has flexibility to raise additional equity from the market, with the GoI stake at 79.86% as on December 31, 2021. The bank has raised Rs 1,650 crore of equity capital through qualified institutional placement (QIP) during the current fiscal. The capital level is also supported by regular infusion from GoI. Capitalisation of Indian Bank provides cushion against asset-side risks. Its net worth coverage for net NPAs was 4.2 times as on December 31, 2021 (3.1 times as on March 31, 2021).

 

* Healthy resource profile

Resource profile of Indian Bank has strengthened following its amalgamation with eAllahabad Bank, with the proportion of low-cost CASA deposits at 41.7% as on December 31, 2021. The proportion remains above the industry average, helping Indian Bank maintain its cost of deposits (CoD) at a manageable level. CoD was 3.85% for the quarter ended December 31, 2021against 4.58% for the corresponding nine months ended of previous fiscal. Moreover, the proportion of highly stable retail deposits (retail term deposits and savings account deposits), at around 94% of total domestic deposits as on December 31, 2021, supports the resource profile.

 

Resource profile of the bank is also expected to benefit from the increased reach following its amalgamation with a wider and more sizeable domestic branch network comprising 5,754 branches and 4,998 automated teller machines (ATMs) & Bunch Note Acceptor (BNA) as on December 31, 2021.

 

Weakness:

* Modest, albeit improving, asset quality

Asset quality of the bank, with reported a gross NPAs of 9.13% as on December 31, 2021 (9.85% as on March 31, 2021), remains modest, albeit with an improving trend. Until fiscal 2020, slippages for the bank were high at Rs 18,567 crore (5.7% of opening net advances) and Rs 17,171 crore (5.6%), respectively, in fiscal 2019. This was on account of slippage in a few large corporate accounts. The slippages have been lower for fiscal 2021 (year ended), at Rs 9,430 crore (Rs 8,962 crore for the 9 months ended December 31, 2021). Asset quality has also been supported by various schemes launched by the GoI and RBI, like Emergency Credit Line Guarantee Scheme, which has benefitted the micro, small & medium enterprises. The one-time restructuring scheme has also benefitted the reported NPA metrics. Indian Bank has restructured (under one time restructuring) around 5.08% (Resolution framework 1.0 + Resolution framework 2.0) of its advances as on December 31, 2021.

 

The traction in the slippages, especially in 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 8.29%, followed by micro, small and medium enterprises (13.90%), agriculture (10.73%) and retail (4.56%) as on December 31, 2021.

 

Asset quality of bank as well as performance of the restructured accounts and ability of the management to contain slippages to NPAs and improve recoveries will remain key monitorable in the near to medium term.

 

* Modest earnings profile

Profitability was constrained primarily by high provisioning. The amalgamated bank had reported net loss of Rs 4,643 crore (with a negative RoA of 0.85%) in fiscal 2020 against net loss of Rs 8,012 crore (with negative RoA of 1.56%) in fiscal 2019. However, profitability of the bank improved in fiscal 2021, as reflected in profit of Rs 3,005 crore with annualised RoA of 0.50%. This was driven by lower provisioning costs of Rs 8,490 crore (1.4%) against Rs 13,609 crore (2.5%) in fiscal 2020. For the 9 months ended December 31, 2021, the bank reported a PAT of Rs 2,961 crore. PCR (excluding technical write-offs) of the bank stood around 72.2% as on December 31, 2021

 

Improvement and sustainability of profit will remain a key rating sensitivity factor. 

Liquidity: Superior

Liquidity is supported by a sizeable retail deposit base that forms a significant part of the total deposits. Liquidity coverage ratio was 187% as on December 31, 2021. Liquidity also benefits from access to systemic sources of funds, such as the liquidity adjustment facility from the RBI, access to the call money market and refinance limits from sources such as National Housing Bank and National Bank for Agriculture and Rural Development.

Outlook Stable

The 'Stable' outlook on the debt instruments reflects expectation of continued, strong government support, adequate capitalisation and healthy resource profile.

Rating Sensitivity factors

Downward factors

• Material change in shareholding and/or expectation of support from GoI
• Higher-than-expected weakening of asset quality because of increase in slippages, with gross NPAs crossing 13%, thereby impacting the earnings profile
• Decline in capital adequacy ratios below the minimum regulatory requirements (including CCB, which is Tier I of 9.5% and overall CAR of 11.5% with effect from October 01, 2021) for an extended period

About the Company

Set up in 1907, Indian Bank is a medium-sized bank. In 2007, it made its initial public offering, resulting in dilution of ownership of GoI to 80%. GoI’s ownership stood at 88.06% as on June 30, 2020, following issuing of shares under amalgamation to the shareholders of Allahabad Bank which reduced to 79.86% following the QIP in June 2021.

 

Amalgamation of Allahabad Bank into Indian Bank was effective from April 1, 2020. Following the amalgamation, the merged entity enjoys the benefits of a larger balance sheet, optimised capital utilisation and wider geographic reach leading to deeper penetration. Indian Bank has a strong domestic branch network comprising 5,754 branches and 4,998 ATMs & BNA. Additionally, the bank has international presence through three overseas branches (one each in Singapore, Colombo and Jaffna) as on December 31, 2021.

 

As on December 31, 2021, gross advances stood at Rs 400,432 crore (Rs 390,317 crore as on March 31, 2021) and deposits at Rs 562,575crore (Rs 538,071 crore as on March 31, 2021).

 

In fiscal 2021, the amalgamated bank reported profit after tax of Rs of Rs 3,005 crore on total income (net of interest expense) of Rs 21,745 crore against loss of Rs 4,643 crore and Rs 18,826 crore, respectively, for the previous fiscal.

 

For the 9month ended December 31, 2021, the bank reported PAT of Rs 3,117 crore on total income (net of interest expense) of Rs 18,161 crore

Any other information:

Note on complexity levels of the rated instrument:

CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.

 

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 the RBI. CRISIL Ratings believes the PONV trigger is a remote possibility in the Indian context given the robust regulatory and supervisory framework and the 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 Hybrid instruments (under Basel II):

Given that hybrid capital instruments such as 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 for 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.

 

Note on Tier I 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 bank's corporate credit rating. Factors that could trigger a default event for non-equity Tier-I capital instruments (under Basel III), resulting in non-payment of coupon, include: i) the bank exercising coupon discretion, ii) inadequacy of eligible reserves to honour coupon payment if the bank reports low profit or a loss or iii) the bank breaching the minimum regulatory CET I, including capital conservation buffer, ratios. Moreover, given their additional risk attributes, the rating transition for non-equity Tier-I capital instruments (under Basel III) can potentially be higher than that for Tier-II instruments.

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating outstanding with outlook
NA	Bonds (Additional Tier I)*	N.A	N.A	N.A	500	Highly Complex	CRISIL AA+/Stable
INE562A08024	Bonds (Basel III Compliant Tier II Bonds)	30-Oct-18	8.9	30-Oct-28	290	Complex	CRISIL AAA/Stable
INE562A08032	Bonds (Basel III Compliant Tier II Bonds)	6-Nov-18	8.85	6-Nov-28	110	Complex	CRISIL AAA/Stable
INE562A08040	Bonds (Basel III Compliant Tier II Bonds)	22-Jan-19	8.53	22-Jan-29	600	Complex	CRISIL AAA/Stable
INE562A08057	Tier I Bonds (Basel III)	8-Dec-20	8.44	Perpetual	1048	Highly Complex	CRISIL AA+/Stable
INE562A08065	Tier 1 bonds(Basel III)	14-Dec-20	8.44	Perpetual	560	Highly Complex	CRISIL AA+/Stable
INE562A08073	Tier 1 Bonds(Basel III)	30-Dec-20	8.44	Perpetual	392	Highly Complex	CRISIL AA+/Stable
INE562A08081	Tier II Bonds (Basel III)	13-Jan-21	6.18	13-Jan-31	2000	Complex	CRISIL AAA/Stable
INE428A08028	Tier II Bonds (Basel III) - Series I^	20-Jan-15	8.78	20-Jan-25	500	Complex	CRISIL AAA/Stable
INE428A08044	Tier II Bonds (Basel III) - Series II^	21-Dec-15	8.64	20-Dec-25	1000	Complex	CRISIL AAA/Stable
INE428A08101	Tier II Bonds (Basel III)^	27-Dec-19	9.53	27-Dec-29	1500	Complex	CRISIL AAA/Stable
NA	Tier II Bonds (Basel III)*	NA	NA	NA	1000	Complex	CRISIL AAA/Stable
NA	Tier I Bonds (Basel III)*	NA	NA	NA	500	Highly Complex	CRISIL AA+/Stable
NA	Certificate of Deposits	NA	NA	7-365 days	25000	Simple	CRISIL A1+

*yet to be issued

^originally issued by erstwhile Allahabad Bank