| Indian Overseas Bank | ||||||||
| Long term ratings upgraded to 'CRISIL AA+/Stable/CRISIL AA/Stable'; Certificate of Deposits Withdrawn | ||||||||
| Rating Action | ||||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||||
| 1 crore = 10 million | ||||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has upgraded the long-term ratings on the tier-II bonds (under Basel III) and fixed deposit programme of Indian Overseas Bank (IOB) to ‘CRISIL AA+/CRISIL AA’ from ‘CRISIL AA/CRISIL AA- while revising the outlook to ‘Stable’ from ‘Positive’.
Also, CRISIL Ratings has withdrawn its short-term ratings on certificate of deposits and long term rating on tier-II bonds of Rs 300 crore as the outstanding against the same is nil and on receipt of confirmation from the debenture trustee (see Annexure - Details of Rating Withdrawn for details). Ratings on Fixed Deposits have been placed on notice for withdrawal. The withdrawals are in line with the CRISIL Ratings withdrawal policy.
The rating action factors in sustained improvement in earnings and asset quality, and strengthening of capital position, which is likely to be maintained over the medium term. The bank has been profitable since the past four fiscals (fiscal 2021) owing to lower credit cost backed by less incremental stress as well as improving net interest margins (NIMs). Supported by regular capital infusion, the bank was able to build sufficient buffer for its non-performing assets (NPAs) with a provision coverage ratio (PCR)[1] of 82% as on March 31, 2024. With higher provisions and lower slippages, the bank is expected to maintain profitability over the medium term.
Asset quality, while moderate, has seen sequential improvement with gross NPA reduced to 3.1% as on March 31, 2024, compared with 7.4% a year earlier. This improvement was mainly driven by higher write-offs as well as controlled slippages.
Besides, the capital position has improved, supported by timely capital infusion and internal accruals, leading to tier 1 and overall capital adequacy ratio (CAR) improving to 14.5%, and 17.3% respectively, as on March 31, 2024, from 12.9% and 16.1%, a year earlier.
Capital position is supported by regular fund infusion and expectation of strong support from the majority stakeholder, the government of India (GoI). In March 2021, GoI infused Rs 4,100 crore (Rs 8,217 crore in fiscal 2020; Rs 5,963 crore in fiscal 2019 and Rs 5,794 crore in fiscal 2018). [1]PCR including technical write-off was 97% as on March 31, 2024.
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Analytical Approach CRISIL Ratings has considered the standalone business and financial risk profiles of IOB and has factored in the strong support that the bank is expected to receive from its majority owner, GoI, both on an ongoing basis and in the event of distress. |
Key Rating Drivers & Detailed Description Strengths: Strong support from the majority owner, GoI The ratings continue to factor in the expected 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. 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 2015-2019, of which Rs 25,000 crore per annum 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. IOB received Rs 5,794 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 fiscals 2018-2021, GoI infused Rs 22,974 crore into IOB. This has helped the bank to improve its capital ratios and meet regulatory requirements. As on March 31, 2024, Tier 1 and overall CAR stood at 14.5% and 17.3%, respectively.
Adequate capital position supported by internal accrual will limit the bank’s dependence on further capital support from GoI.
Weakness: Moderate asset quality and earnings profile, albeit improving Asset quality remains moderate, albeit improving, with NPA ratios comparable with the industry average. Gross NPAs improved to 3.1% as on March 31, 2024, from 7.4% as on March 31, 2023 (9.8% as on March 31, 2022, 11.7% as on March 31, 2021; 14.8% as on March 31, 2020), aided by write-offs and controlled slippages. The bank has written off a cumulative Rs 43,104 crore over fiscals 2019-2024, of which Rs 7,214 crore was written off during fiscal 2024 (Rs 3,413 crore in fiscal 2023, Rs 3,769 crore in fiscal 2022, Rs 4,618 crore in fiscal 2021, Rs 16,407 crore in fiscal 2020 and Rs 7,683 crore in fiscal 2019). Aside from write offs, structural improvement in asset quality is also seen through lower slippages (as a percentage of net opening advances) which were down to 0.9% in fiscal 2024 from 3.1% in fiscal 2023 and 4.0% in fiscal 2022; after remaining elevated in prior years (5.4% in fiscal 2020, 6.7% in fiscal 2019 and 12.0% in fiscal 2018).
Earnings, while modest, have been improving with profit reported since the past three fiscals. The bank reported net profit in fiscal 2021 after six consecutive years of incurring losses. Operating margin improved owing to continual reduction in credit cost to 1.0% in fiscal 2024, 1.2% in fiscal 2023 and 1.4% in fiscal 2022 from 1.9% in fiscal 2021 and 4.7% in fiscal 2020. Profit after tax (PAT) stood at Rs 2,656 crore in fiscal 2024 with return on assets (ROA) of 0.8% backed by improved NIM and controlled credit cost. Ability to sustain improvement in profitability will remain a key monitorable, with expected impact on NIMs from higher funding cost and trend in slippages determining the trajectory of credit cost. |
Liquidity: : Strong Liquidity is supported by a sizeable retail deposit base, forming a large chunk of total deposits. Liquidity coverage ratio was 139% as on March 31, 2024, which is higher than the regulatory requirement. Also, the bank benefits from access to systemic sources of funds such as the liquidity adjustment facility from the RBI, 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 Overseas Bank supports its already strong credit risk profile.
The ESG profile for financial sector entities 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 direct adverse environmental impact, lending decisions may have a bearing on the environment.
IOB has an ongoing focus on strengthening the various aspects of its ESG profile.
Key ESG highlights:
There is growing importance of ESG among investors and lenders. The commitment of IOB to ESG will play a key role in enhancing stakeholder confidence, given its access to domestic and foreign capital markets. |
Outlook Stable CRISIL Ratings believes IOB will continue to benefit from government support on an ongoing basis as well as in the event of distress. Asset quality and profitability are expected to maintain positive trajectory, however, will remain a monitorable |
Rating Sensitivity factors Upward factors
Downward factors
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About the Bank
For fiscal 2024, the bank reported PAT of Rs 2,656 crore on total income (net of interest expense) of Rs 15,486 crore, compared with Rs 2,099 crore and Rs 12,364 crore, respectively, in fiscal 2023. |
Key Financial Indicators
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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: |
Annexure - Details of Instrument(s)
Annexure - Details of Rating Withdrawn
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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