| Indian Bank | ||||||||||||
| 'CRISIL AAA/Stable' assigned to Tier II Bonds (Under Basel III) | ||||||||||||
| Rating Action | ||||||||||||
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| 1 crore = 10 million | ||||||||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has assigned 'CRISIL AAA/Stable' rating to Rs 600 crore Tier-II Bonds (Under Basel III) of Indian Bank. CRISIL has also reaffirmed its rating 'CRISIL AAA/CRISIL AA+/Stable' on the existing debt instruments of the bank. The ratings continue to reflect the strong expectation of support from majority owner, the Government of India (GoI), the bank's strong capitalisation, and comfortable resource profile. Asset quality is modest, having deteriorated in recent years; however, CRISIL does not expect any material incremental slippages over the medium term Geographic concentration in operations also remains high. |
| Analytical Approach |
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The ratings on Indian Bank debt instruments continue to factor in the strong support expected from its majority owner, the GoI. This is because GoI is both the 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 GoI, given the criticality of the sector to the economy, the strong public perception of sovereign backing for PSBs, and the severe implications of any PSB failure in terms of political fallout, systemic stability, and investor confidence in public sector institutions. CRISIL has fully consolidated the business and financial risk profile of Indian Bank and its subsidiaries as CRISIL expects strong managerial and financial support given their high strategic importance and high moral obligation on account of majority shareholding and shared brand name. |
| Key Rating Drivers & Detailed Description |
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Strengths * Strong expectation of support from the government In its ratings on public sector banks (PSBs), CRISIL continues to factor in the strong support of the government, which is both the majority shareholder and guardian of India's financial system. Stability of the banking sector is of prime importance to the government, given the criticality of the sector to the economy, strong public perception of sovereign backing for PSBs, and severe implications of failure of any PSB in terms of political fallout, systemic stability, and investor confidence in public sector institutions. Majority ownership creates a moral obligation on the government to support PSBs, including Indian Bank. As part of the 'Indradhanush' framework, the government has pledged to infuse at least Rs 70,000 crore in PSBs between fiscals 2015 and 2019, of which Rs 25,000 crore each was infused in fiscals 2016 and 2017. Furthermore, in October 2017, the government had outlined recapitalisation package of Rs 2.11 lakh crores over fiscals 2018 and 2019, out of which PSBs received around Rs 88,139 crore from the government in fiscal 2018. Government will continue to provide distress support to all PSBs and will not allow any of them to fail; it will also support them to meet Basel III capital regulations. * Strong capitalisation Indian Bank's capitalisation remained comfortable, with CET 1 and Tier-I capital adequacy ratio (CAR) at 11.00% and 11.33% as on March 31, 2018 (11.8% and 12.2%% respectively as on March 31, 2017). For the first half ending September 30, 2018, the CET 1, tier 1 and CAR stood at 11.2%, 11.5% and 12.7% respectively. The bank has flexibility to raise additional equity from the market, with GoI stake at 81.7% as on September 30, 2018. GoI's last infused capital of Rs 280 crore in fiscal 2015. The capital profile has also been supported by continued internal accruals; Indian Bank is among the few PSBs that have remained profitable in the past couple of years. Indian Bank's strong capitalisation provides cushion against asset-side risks. Its networth coverage for net non-performing assets (NPAs) was around 2.7 times as on September 30, 2018 (3.1 times as on March 31, 2018). * Comfortable resource profile: Indian Bank's resource profile remains comfortable, with the proportion of low-cost current account and savings account (CASA) deposits remained stable at 37.8% as on March 31, 2018, from 37.7% a year earlier. As on September 30, 2018, the CASA ratio stood at 36.1% as against 37.2% recorded in the corresponding period last year. The proportion of highly stable retail deposits (retail term deposits and savings account deposits), at 84% of total deposits as on September 30, 2018, supports the resource profile. This is underpinned by its sizeable branch network in the rural and semi-urban areas (54% of total branches as on September 30, 2018). Weakness * Modest asset quality Indian Bank has modest asset quality with gross non-performing assets (NPAs) of 7.16% as on September 30, 2018 compared to 7.37% as on March 31, 2018 (7.47% as on March 31, 2017). The net NPA ratio stood at 4.23% as on September 30, 2018 as against 3.81% as on March 31, 2018 (4.39% as on March 31, 2017). While NPAs have increased in recent years, they remain better than PSB average. Slippages to NPAs were around 3.4% (annualized) in the first half fiscal 2019 and 3.9% in fiscal 2018 compared to 2.6% in fiscal 2017. While CRISIL expects some deterioration in the asset quality metrics going forward, the pace of slippages is expected to be lower. This is because large slippages are expected to be limited going forward as the unrecognized stress in the corporate portfolio is low. Ability to recover from large accounts and manage asset quality in the sizeable small and medium enterprise portfolio will be determinant of the asset quality over the medium term. * Geographic concentration in operations: Tamil Nadu accounted for about 40.5% of the bank's advances as on September 30, 2018. While the bank is focused on expansion outside Tamil Nadu, the state will continue to account for a sizeable proportion of its business. Hence, Indian Bank's credit risk profile will remain susceptible to changes in the economic and business environment in Tamil Nadu. |
| Outlook: Stable |
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CRISIL believes Indian Bank will continue to benefit from strong GoI support and will maintain strong capitalisation over the medium term. While asset quality has been under pressure, the bank's performance has been better than that of peers. The outlook may be revised to 'Negative' if there is significant deterioration in asset quality or earnings. |
| About the Bank |
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Set up in 1907, Indian Bank is a medium-sized bank. In 2007, it made its initial public offering, resulting in dilution of GoI's ownership to 80%. GoI's ownership stood at 81.7% as on September 30, 2018. The bank had 2830 branches, including 3 overseas branches (one each in Singapore, Colombo, and Jaffna), as on September 30, 2018. |
| Key Financial Indicators | ||||||||||||||||||||||||||||
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
| 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 notches down the rating on these instruments from the bank's corporate credit rating. The rating on the Tier-I Bonds (under Basel III) has, therefore, been lowered by one notches from Indian Bank's corporate credit rating, to 'CRISIL AA+/Stable' in line with CRISIL's criteria (refer to 'CRISIL's rating criteria for Basel III-compliant instruments of banks'). | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The 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 losses or low profits; or iii) the bank breaching the minimum regulatory Common Equity Tier-1 (CET I; including 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 than that for Tier-II instruments. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Instrument(s) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Consolidation | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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