| Indian Overseas Bank | ||||||||
| Rating outlook revised to 'Positive'; Ratings reaffirmed | ||||||||
| Rating Action | ||||||||
| ||||||||
| 1 crore = 10 million | ||||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has revised its rating outlook on the Tier II Bonds (Under Basel III) and fixed deposit programme of Indian Overseas Bank (IOB) to 'Positive' from 'Stable', and reaffirmed the rating at ‘CRISIL A+/FAA’; the short-term rating on the certificate of deposit programme has been reaffirmed at 'CRISIL A1+'. Further, CRISIL Ratings has withdrawn its rating on the Rs 300 crore tier-II bonds (Basel III), in line with its withdrawal policy.
The outlook revision factors in the improvement in capital position supported by regular fund infusion and expectation of strong support from the majority stakeholder, the Government of India (GoI). Capitalisation has improved with timely infusion by the GoI to meet the regulatory requirement. In March 2021, the GoI infused Rs 4,100 crore (Rs 8,217 crore in fiscal 2020, Rs 5,963 crore in fiscal 2019, and Rs 4,694 crore in fiscal 2018). Consequently, the tier 1 and overall capital adequacy ratio (CAR) improved to 12.91% and 15.32%, respectively, as on March 31, 2021 (12.84% and 15.41%, respectively, as on September 30, 2021), from 8.21% and 10.72%, respectively, as on March 31, 2020. The Reserve Bank of India (RBI), in its press release dated September 29, 2021, has taken IOB out of its prompt corrective action framework. In line with the measures announced by the RBI for Covid-19, IOB had given moratorium to its borrowers. Though collections declined during the initial months of the moratorium, they have inched up since then. However, the second wave of the pandemic had resulted in intermittent lockdowns and localised restrictions, again impacting collections. Although the impact has been moderate compared to the past fiscal, CRISIL Ratings believes any change in the payment discipline of borrowers may affect delinquency levels. The bank has restructured micro, small and medium enterprise (MSME) loans under the various MSME restructuring schemes announced by the RBI in January 2019, February 2020 and August 2020; these loans formed 0.4% of gross advances as on September 30, 2021. Furthermore, pursuant to RBI’s August 2020 Resolution Framework 1.0 and May 2021 Resolution Framework 2.0, restructuring under these Covid-19 schemes stood at 4.6% of gross advances as on September 30, 2021. Nevertheless, the ability of the bank to manage collections and asset quality, given the current macro-economic environment, will be a key monitorable. 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 its ratings, CRISIL Ratings has considered the standalone business and financial risk profiles of IOB. CRISIL Ratings has also factored in the strong support that the bank is expected to receive from its majority owner, the GoI, both on an ongoing basis and in the event of distress. |
Key Rating Drivers & Detailed Description Strengths: Expectation of strong support from the majority owner, Government of India The ratings continue to factor in the expectation of strong government support, both on an ongoing basis and in the event of distress. This is because GoI is both 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 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 IOB.
As part of the Indradhanush framework, the government had pledged to infuse at least Rs 70,000 crore in PSBs over fiscals 2015-19, of which Rs 25,000 crore each was infused in fiscals 2016 and 2017. Furthermore, in October 2017, the government had outlined a recapitalisation package of Rs 2.11 lakh crore over fiscals 2018-19. IOB received Rs 4,694 crore in fiscal 2018 and Rs 5,963 crore in fiscal 2019 under this package. Also, GoI allocated Rs 70,000 crore in fiscal 2020, of which IOB received Rs 8,217 crore. During fiscal 2021, GoI infused Rs 4,100 crore. Thus, over the past four fiscals, GoI it has infused Rs 22,974 crore in IOB.
This has helped the bank in improving its capital ratios and meeting regulatory requirements. As on September 30, 2021, tier 1 and overall CAR stood at 12.84% and 15.41%, respectively.
Weaknesses: Weak asset quality and earnings profile, albeit improving Asset quality remains weak, with NPA ratios higher than the industry average. However, gross NPAs improved to 10.66% as on September 30, 2021, from 11.69% as on March 31, 2021 (14.78% as on March 31, 2020; 21.97% as on March 31, 2019; and 25.28% as on March 31, 2018), primarily aided by write-offs. The bank has written off Rs 1,948 crore during the first-half of fiscal 2022 and Rs 4,618 crore during fiscal 2021 (Rs 16,407 crore written off in fiscal 2020; Rs 7,683 crore in fiscal 2019). Slippages to NPAs (as a percentage of net opening advances) had declined to 2.6% in fiscal 2021 (inched up to 4% [annualised] during the first-half of fiscal 2022) from 5.4% in fiscal 2020 (6.7% in fiscal 2019 and 12.0% in fiscal 2018). Asset quality may be impacted by the third wave of the pandemic and possible slowdown in collections and recoveries. The ability of the bank to contain weakening in asset quality will remain a key monitorable.
Given asset quality pressures, the bank’s overall profitability was constrained over the last few years. The bank reported a net profit in fiscal 2021 and the first-half of fiscal 2022 after six consecutive years of incurring losses. Profitability increased on the back of improvement in credit costs to 1.4% (annualised in the first-half of fiscal 2022) and 1.9% during fiscal 2021, from 4.7% in fiscal 2020 and 4.4% in fiscal 2019. The pre-provisioning profit has also been aided by profit on sale of investments and improvement in the cost of deposits. Sustained profitability will remain a key monitorable primarily because of likely pressure on asset quality and higher provisioning requirement. |
Liquidity: Adequate Liquidity is supported by a sizeable retail deposit base, forming a sizeable chunk of total deposits. Liquidity coverage ratio was 177% as on September 30, 2021, which is higher than the regulatory requirement. Liquidity also benefits from access to systemic sources of funds such as the liquidity adjustment facility from RBI, call money market, and refinance limits from sources such as National Housing Bank and National Bank for Agriculture and Rural Development. |
Outlook: Positive CRISIL Ratings believes IOB will continue to benefit from strong government support. |
Rating Sensitivity Factors Upward Factors
Downward Factors
|
About the Bank Established in 1937 by Mr M. Ct. M. Chidambaram Chettyar, IOB was nationalised in 1969. Headquartered in Chennai, the bank had 3,221 domestic branches, 4 overseas branches and 3,114 ATMs (automated teller machines) as on September 30, 2021. As on September 30, 2021, total advances and deposits were Rs 1,46,940 crore and Rs 2,50,890 crore, respectively. The loan portfolio comprises corporate loans (26%), MSME loans (18%), agriculture loans (25%), retail loans (24%) and overseas loans (7%). CASA (current account and savings account) deposits-to-total deposit ratio was 42.6% as on September 30, 2021 (42.5% as on March 31, 2021, and 40.3% as on March 31, 2020).
During the first-half of fiscal 2022, the bank reported profit after tax (PAT) of Rs 703 crore on total income (net of interest expense) of Rs 5,342 crore, against Rs 269 crore and Rs 4,973 crore, respectively, for the corresponding period previous fiscal.
In fiscal 2021, PAT was Rs 831 crore on total income (net of interest expense) of Rs 11,458 crore, against loss of Rs 8,527 crore and total income of Rs 8,663 crore, for the previous fiscal. |
Key Financial Indicators
|
Any other information 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 complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
Annexure - Details of Rating Withdrawn
|
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Criteria Details
|