Rating Rationale
July 31, 2020 | Mumbai
Indian Overseas Bank
Ratings Reaffirmed 
 
Rating Action
Tier II Bonds (Under Basel III) aggregating Rs.1900 Crore CRISIL A+/Stable (Reaffirmed)
Lower Tier-II Bonds (under Basel II) aggregating Rs.1000 Crore (Reduced from Rs.1290 Crore) CRISIL A+/Stable (Reaffirmed)
Upper Tier-II Bonds (Under Basel II) Aggregating Rs.967 Crore (Reduced from Rs.1477 Crore) CRISIL A-/Stable (Reaffirmed)
Tier-I Perpetual Bonds (Under Basel II) Aggregating Rs.300 Crore  CRISIL A-/Stable (Withdrawn)
Rs.200000 Crore Fixed Deposit Programme FAA/Stable (Reaffirmed)
Certificates of Deposits Programme CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A+/CRISIL A-/FAA/Stable/CRISIL A1+' ratings on the debt instrument, fixed deposit programme and certificate of deposits of Indian Overseas Bank (IOB). CRISIL has also withdrawn its rating on the Rs 300 crore tier I perpetual bonds, Rs 510 crore upper tier II bonds and Rs 290 crore lower tier II bonds (all under Basel II), as all these instruments have been redeemed. The withdrawal is in line with CRISIL's withdrawal policy.
 
The nationwide lockdown, imposed by the Government of India (GoI) to contain the spread of the Covid-19 pandemic, has impacted disbursements and collections of financial institutions. The lockdown has now been extended in containment zones, with re-opening of the prohibited activities in a phased manner in other areas. However, certain states have implemented localised lockdowns. Herein, CRISIL believes that eventual lifting of restrictions will continue to be in a phased manner. Any delay in return to normalcy will put further pressure on collections and asset quality metrics of companies. The bank has also offered a moratorium to its borrowers. Any change in behaviour of borrowers on the payment discipline can affect delinquency levels post the moratorium.
 
Given this, gross non-performing assets of IOB could increase from current levels. This in turn could lead to higher credit cost, thereby impacting the profitability of the bank, and hence, remains a key monitorable.
 
The ratings continue to factor in expectation of strong support from the majority stakeholder, the Government of India (GoI). The ratings are constrained by stress on asset quality, especially in the corporate portfolio. While slippages (as a percentage of net opening advances) have reduced from earlier levels, they remained high at 5.4% in fiscal 2020, vis-a-vis 6.7% in fiscal 2019. Gross non-performing assets (NPAs) ratio was also high, albeit lower than the previous year, at 14.78% as on March 31, 2020, (21.97% as on March 31, 2019) primarily due to high write-offs in fiscal 2020. The resultant high provisioning requirement would continue to impact profitability over the medium term, as seen in last few fiscals. Return on assets (RoA) was a negative 3.3% in fiscal 2020 (negative 1.5% in fiscal 2019).  However, regular capital infusions made by the government, under the public sector banks (PSBs) recapitalisation plan, should enable the bank to absorb the increase in provisioning burden. Even so, capitalisation metrics remain weak, with high dependence on timely capital infusion by GoI to meet regulatory requirement. In fiscal 2020, GoI has infused Rs 8217 crore (Rs 5,963 crore in fiscal 2019, and Rs 4,694 crore in fiscal 2018). As on March 31, 2020, the Tier 1, and overall capital adequacy ratio (CAR) stood at 8.21% and 10.72%, respectively (7.85% and 10.21%, respectively, as on March 31, 2019).

Analytical Approach

For arriving at the ratings, CRISIL has considered the standalone business and financial risk profiles of IOB. CRISIL 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 majority owner, Government of India
The rating continues to factor in 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 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 to 2019, of which Rs 25,000 crore each was infused in fiscals 2016 and 2017. Further, in October 2017, the government had outlined a recapitalisation package of Rs 2.11 lakh crore over fiscals 2018 and 2019; 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. Thus, over the past three fiscals, GoI has infused around Rs 18,874 crore in IOB.
 
Weaknesses:
* Weak asset quality
Asset quality remains weak, with NPA ratios significantly exceeding the industry average. Gross NPAs stood at 14.78% as on March 31, 2020 (21.97% as on March 31, 2019; 25.28% as on March 31, 2018). In absolute terms, the NPAs declined by around 40% in fiscal 2020, as compared to the previous fiscal; primarily due to write-offs of Rs 16,407 crore in the loan book. While slippages to NPAs (as a percentage of net opening advances) have declined to 5.4% in fiscal 2020, as compared with 6.7% in fiscal 2019, they remain high. As on March 31, 2020, total exposure in special mention account 1 and 2 categories (accounts of Rs 5 crore and above) were around Rs 5,206 crore, which could add to the stress on asset quality. Also, asset quality will be under pressure owing to the Covid-19 pandemic and possible slowdown in recoveries in the near to medium term. Ability to contain deterioration in asset quality will remain a key monitorable.
 
* Weak earnings
Weakening in asset quality has impacted earnings amidst high provisioning metrics. The pre-provisioning profit was Rs 3534 crore for the year ended March 31, 2020, as compared to Rs 5034 crore in the corresponding period of previous fiscal.  Also, there was a net loss of Rs 8257 crore (return on assets at a negative 3.3%) for year ended March 31, 2020 (net loss of Rs 3738 crore in fiscal 2019), primarily on account of high provisioning cost (forming around 4.7% of average assets). Given this, the provision coverage ratio increased to 67% as on March 31, 2020, from 57% as on March 31, 2019 and 47% as on March 31, 2018. Furthermore, the net interest margin, at 2.1%1 for both, fiscals 2020 and 2019, was lower compared to peers, adversely impacting overall profitability. Profitability is likely to remain significantly under pressure over the next few quarters primarily because of sustained pressure on asset quality and higher provisioning requirements; the earnings level will continue to be a key rating sensitivity factor.
 
* Weak capitalisation ratios
CET 1, tier 1, and overall CAR were 8.21%, 8.21%, and 10.72%, respectively, as on March 31, 2020. Capitalisation has been weak on account of high provisioning requirement, leading to higher and continued losses. The government's capital infusion of Rs 8217 crore in fiscal 2020 (Rs 4,694 crore and Rs 5,963 crore in fiscals 2018 and 2019), has supported capital ratios to some extent.  Capitalisation is primarily driven by continued government support, which is critical in the context of making coupon payments on hybrid instruments issued under Basel II.
Liquidity Adequate

Liquidity is adequate, supported by a sizeable retail deposit base, forming sizeable chunk of total deposits. Liquidity coverage ratio was 214% as on March 31, 2020, against the regulatory requirement of 100%. Excess statutory liquidity ratio was Rs 25,436 crore (11.23%) as on that date. Liquidity also benefits from access to systemic sources of funds such as the liquidity adjustment facility from the Reserve Bank of India, the call money market, and refinance limits from sources such as National Housing Bank and National Bank for Agriculture and Rural Development.

Outlook: Stable

CRISIL believes IOB will continue to benefit from strong government support. Asset quality and profitability are, however, expected to remain under pressure over the medium term. 

Rating Sensitivity factors
Upward factors
* Sustained and substantial improvement in asset quality and earnings
 
Downward factors
* Any change in stance of support from GoI
* Decline in CAR below minimum regulatory requirements (including CCB, which is Tier I of 9.5% and overall CAR of 11.5%)
About the Bank

Established in 1937 by Mr M Ct M Chidambaram Chettyar, IOB was nationalised in 1969. Headquartered in Chennai, the bank had 3,270 domestic branches, 4 overseas branches, and 3,011 ATMs (automated teller machines) as on March 31, 2020.

 1Calculation as per CRISIL's analytical methodology, may differ from reported numbers

Key Financial Indicators
As on / for the period ended March 31, 2020 2019
Total assets Rs crore 2,60,726 2,50,007
Total income (net of interest expense) Rs crore 8,663 9,485
PAT Rs crore (8,527) (3,738)
Gross NPA % 14.78 21.97
Overall CAR % 10.72 10.21
Return on assets % -3.3 -1.5

Any other information: Not applicable

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 Reserve Bank of India (RBI). CRISIL believes that 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 in the case of 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.
 
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity
Date		 Issue Size (Rs Crore) Complexity Levels CRISIL Rating With Outlook
NA Tier II Bonds* NA NA NA 300  Complex CRISIL A+/Stable
INE565A08035 Tier II Bonds 24-Sep-19 9.08 24-Sep-29 500  Complex CRISIL A+/Stable
INE565A09215 Lower Tier II 31-Dec-10 8.95 31-Dec-20 1000  Complex CRISIL A+/Stable
INE565A09223 Upper Tier II 10-Jan-11 9 10-Jan-21 (If call option is not exercised at the end of 10th year, then there will be a step up of 50 bps from the 11th year) 967 Highly Complex  CRISIL A-/Stable
INE565A09256 Tier II Bonds 03-Nov-16 9.24 3-Nov-21 (Call option at the end of 5th year) 800  Complex CRISIL A+/Stable
INE565A09264 Tier II Bonds 10-Dec-18 11.7 10-Dec-28 300 Complex CRISIL A+/Stable
NA Fixed deposit programme NA NA NA 200000  Simple FAA/Stable
NA Certificate of deposits programme NA NA 7-365 days NA  Simple CRISIL A1+
*Not yet issued
 
Annexure - Details of Rating Withdrawn
ISIN Name of Instrument Date of
Allotment		 Coupon
Rate (%)		 Maturity Date Issue Size
(Rs Crore)		 Complexity
Levels
INE565A09207 Tier I Perpetual Bonds 29-Sep-09 9.3 29-Sep-19 300 Highly Complex
INE565A09181 Lower Tier II 24-Aug-09 8.48 24-Aug-19 290 Complex
INE565A09199 Upper Tier II 01-Sep-09 8.8 1-Sep-2019 510 Highly Complex
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Certificate of Deposits  ST  0.00  CRISIL A1+      29-07-19  CRISIL A1+  08-10-18  CRISIL A1+  11-09-17  CRISIL A1+  CRISIL A1+ 
            05-07-19  CRISIL A1+  25-01-18  CRISIL A1+       
                11-01-18  CRISIL A1+       
Fixed Deposits  FD  200000.00  FAA/Stable      29-07-19  FAA/Stable  08-10-18  FAA/Stable  11-09-17  FAA/Negative  FAA/Negative 
            05-07-19  FAA/Stable  25-01-18  FAA/Stable       
                11-01-18  FAA/Negative       
Lower Tier-II Bonds (under Basel II)  LT  1000.00
31-07-20 		 CRISIL A+/Stable      29-07-19  CRISIL A+/Stable  08-10-18  CRISIL A+/Stable  11-09-17  CRISIL A+/Negative  CRISIL A+/Negative 
            05-07-19  CRISIL A+/Stable  25-01-18  CRISIL A+/Stable       
                11-01-18  CRISIL A+/Negative       
Perpetual Tier-I Bonds (under Basel II)  LT  0.00
31-07-20 		 Withdrawn      29-07-19  CRISIL A-/Stable  08-10-18  CRISIL A-/Stable  11-09-17  CRISIL A-/Negative  CRISIL A-/Negative 
            05-07-19  CRISIL A-/Stable  25-01-18  CRISIL A-/Stable       
                11-01-18  CRISIL A-/Negative       
Tier II Bonds (Under Basel III)  LT  1600.00
31-07-20 		 CRISIL A+/Stable      29-07-19  CRISIL A+/Stable  08-10-18  CRISIL A+/Stable  11-09-17  CRISIL A+/Negative  CRISIL A+/Negative 
            05-07-19  CRISIL A+/Stable  25-01-18  CRISIL A+/Stable       
                11-01-18  CRISIL A+/Negative       
Upper Tier-II Bonds (under Basel II)  LT  967.00
31-07-20 		 CRISIL A-/Stable      29-07-19  CRISIL A-/Stable  08-10-18  CRISIL A-/Stable  11-09-17  CRISIL A-/Negative  CRISIL A-/Negative 
            05-07-19  CRISIL A-/Stable  25-01-18  CRISIL A-/Stable       
                11-01-18  CRISIL A-/Negative       
All amounts are in Rs.Cr.
Links to related criteria
CRISILs Approach to Financial Ratios
Rating Criteria for Banks and Financial Institutions
Rating Criteria for Finance Companies
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Entities Based on Government Support
Rating Criteria for Hybrid Capital instruments issued by banks under Basel II guidelines
Rating criteria for Basel III - compliant non-equity capital instruments

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