Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AAA/Stable’ rating to Rs.5000 crore infrastructure bonds of Indian Bank and reaffirmed its ‘CRISIL AAA/CRISIL AA+/Stable/CRISIL A1+' ratings on the existing debt instruments.

 

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 has improved. 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 CET 1, tier 1 and overall capital to risk-weighted adequacy ratio (CRAR) of 13.42%,13.93% and 16.47%, respectively, as on June 30, 2024 (12.31%,12.88% and 15.78%, respectively, as on June 30, 2023).

 

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.

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 13.42%,13.93% and 16.47%, respectively, as on June 30, 2024 (12.31%,12.88% and 15.78%, respectively, as on June 30, 2023). The bank has flexibility to raise additional equity from the market, with the GoI stake at 73.84% as on March 31, 2024. 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 30 times as on June 30, 2024 (26.3 time as on March 31, 2024 and 11.9 times as on March 31, 2023).

 

Healthy resource profile

Resource profile of Indian Bank has strengthened following its amalgamation with eAllahabad Bank, with large deposit base and comfortable mix of low-cost deposits. Domestic, low-cost current account and savings account deposits stood at 40.56% of total domestic deposits as on June 30, 2024 (42.31% as on March 31, 2024). Share of bulk deposits (>Rs 3 crore) is moderate at around 16.31% of total domestic deposits as of June 30, 2024.  Cost of deposits saw some uptick to 5.05% for first quarter of fiscal 2025 against 4.60% for the corresponding period of previous fiscal. However, the proportion of highly stable retail deposits (retail term deposits and current & savings account deposits), at around 80.65% of total domestic deposits as on June 30, 2024, continues to support 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 5846 branches, 3 Overseas branches, 1 IBU and 5,093 automated teller machines (ATMs) & Bunch Note Acceptor (BNA) as on June 30, 2024.

 

Weakness:

Modest, albeit improving, asset quality

Asset quality of the bank, with reported a gross NPAs of 3.77% as on June 30, 2024 (3.95% as on March 31, 2024 and 5.95% as on March 31, 2023), remains modest, albeit with an improving trend. Until fiscal 2020, bank witnessed high slippages at Rs 18,567 crore (slippage ratio* at 5.7% of opening net advances) and Rs 17,171 crore (5.6%*), respectively, in fiscal 2019. These primarily stemmed from large corporate exposure in vulnerable sectors. The asset quality metrics has improved significantly driven both by lower slippages and high write-offs, with slippages of Rs 6,769 crore (1.3%) for fiscal 2024 and Rs 7,042 crore (1.5%) for fiscal 2023. Improvement in asset quality metrics was witnessed across all segments with gross NPA as on June 30, 2024 for retail at 2.05%, agriculture (7.06%), MSME (9.68%) and corporate (0.59%). Also supported by recoveries through the Insolvency and Bankruptcy Code route, gross NPAs have seen an improving trend. Furthermore, 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.

 

CRISIL Ratings will continue to monitor the traction in asset quality as well as ability of the management to contain slippages to NPAs and improve recoveries.

 

Modest earnings profile

Profitability of the bank was historically constrained primarily by high provisioning costs. The amalgamated bank had reported net loss of Rs 4,643 crore (with a negative return on assets (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, the bank has been reporting profit since then and in fiscal 2024 reported profit of Rs 8063 crore with an RoA* of 1.07% as compared to Rs 5,282 crore with RoA of 0.76% for fiscal 2023. This was driven by lower provisioning costs of Rs 5,888 crore (0.8%) in fiscal 2024 as against Rs 9,356 crore (1.4%) in fiscal 2023. PCR (excluding technical write-offs) of the bank stood around 89.47% as on March 31, 2024. For first quarter of fiscal 2025, the bank reported profit of Rs 2,403 crore with annualised RoA of 1.21% as compared to Rs 1,709 crore with annualised RoA of 0.96% for corresponding period of previous fiscal.

 

Improvement in earnings profile is supported by improved NIMs for fiscal 2024 were at 3.1% (as % of average total assets) as compared to 2.9% for fiscal 2023 mainly due to higher proportion of advances in high yielding assets. Operating expenses have inched up in fiscal 2024 to 1.9% (as % of average total assets) as compared to 1.8% in fiscal 2023 on account of wage revision.

 

Improvement and sustainability of profitability 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 122% as on June 30, 2024. Liquidity is also supported by 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.

 

ESG profile

CRISIL Ratings believes the Environment, Social and Governance (ESG) profile of Indian Bank 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 a 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 a direct adverse environmental impact, the lending decisions may have a bearing on the environment.

 

Indian Bank has an ongoing focus on strengthening the various aspects of its ESG profile.

 

Key ESG highlights of Indian Bank:

• ESG disclosures of the bank are evolving, and it is in the process of further strengthening the disclosures going forward.
• The Bank has taken initiatives like installation of solar power and LED lighting to reduce energy consumption and is periodically conducting energy audits for its branch and offices.
• In fiscal 2024, share of women employees stood at 30%, broadly in-line with the previous fiscal. However, attrition rate for the bank rose marginally to 2% from 1% in the previous fiscal.
• The governance structure is characterized by 36% independent directors and extensive financial disclosures.

There is growing importance of ESG among investors and lenders. The commitment of Indian Bank to ESG will play a key role in enhancing stakeholder confidence, given access to domestic and foreign capital markets.

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 with an asset base of Rs.7.97 lakh crore and networth of Rs 60,802 crore as on June 30, 2024. GoI’s ownership stands at 73.84% as on date. Previously GOI stake was 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 5,846 branches and 5,093 ATMs & BNA. Additionally, the bank has international presence through three overseas branches (one each in Singapore, Colombo and Jaffna) and one IBU as on June 30, 2024

Key Financial Indicators

As on/ for the period March 31	Unit	2024	2023
Total Assets	Rs Crore	7,92,619	7,10,501
Total income (net of interest expenses)	Rs Crore	31,141	27,368
PAT	Rs Crore	8,063	5,282
Gross NPAs	%	3.95	5.95
Overall capital adequacy ratio	%	16.44	16.49
Return on assets (annualised)	%	1.07	0.76

 

As on/ for the period June 30	Unit	2024	2023
Total Assets	Rs Crore	7,96,566	7,10,565
Total income (net of interest expenses)	Rs Crore	8,084	7,413
PAT	Rs Crore	2,403	1,709
Gross NPAs	%	3.77	5.47
Overall capital adequacy ratio	%	16.47	15.78
Return on assets (annualised)	%	1.21	0.96