CRISIL has reaffirmed its 'CRISIL AA+/CRISIL AA¹/Stable/CRISIL A1+' ratings on the debt instruments of IndusInd Bank Limited (IndusInd Bank).
 
The ratings reaffirmation reflect the healthy capitalisation levels with high core equity ratio and comfortable earnings profile marked by healthy pre-provisioning profits. These strengths are partially offset due to potential challenges in asset quality arising out of exposures to few stressed groups as well as impact in retail book due to economic slowdown and Covid-19, which will be an industry-wide phenomena. The resource profile for the bank is average with high share of bulk deposits, albeit, that retail deposits has been a focus area in recent years.
 
CRISIL has noted that IndusInd, like a few other private sector banks, has faced withdrawals in deposits from certain State Government entities - especially post the recent moratorium announcement on a large private sector bank. In the interim, till the market sentiment around deposits with private sector banks in general improves, IndusInd is focused on maintaining higher liquidity levels. In addition to having excess statutory liquidity ratio (SLR), the Bank has tied up refinance limits and foreign currency lines. The Bank also has access to the inter-bank participation certificate (IBPC) market due to its high priority sector eligible vehicle finance and microfinance portfolio. As per management, the Bank's Liquidity Coverage Ratio (LCR) has remained at around 110%, even post deposit outflow, over the last two weeks (as compared to 113.57% as on December 31, 2019). With RBI's announcement on liquidity measures, it is expected that the bank's liquidity profile will further improve leading to increase in LCR. Nevertheless, any subsequent significant withdrawals on the deposit front will remain a key rating sensitivity factor.
 
Capitalisation metrics of the bank remain healthy as reflected in CET1, Tier 1 and overall capital adequacy ratio (CAR) at 13.6%, 15.0% and 15.4% respectively as on December 31, 2019. The earnings profile of the bank is comfortable marked by healthy pre-provisioning profits. In terms of asset quality, CRISIL expects the gross non-performing assets (GNPA) levels to increase from current levels primarily due to slippages in the corporate segment and vulnerability of the vehicle finance and microfinance book due to the economic slowdown and Covid-19, which will be an industry-wide phenomena. However, with RBI announcing measures for moratorium on terms loans and deferment of interest on working capital accounts for 3 months, the reporting impact will be marginalized. Further, the Bank's healthy pre-provisioning profits, coupled with high regulatory capital ratios should be able to absorb the potential asset quality stress in the near term.
 
IndusInd has reported a healthy growth in net advances at 20% (year-on-year) to reach Rs 2,07,413 crores as on December 31, 2019. The growth has been led by both the corporate and retail segments with each constituting around 46: 54% of the portfolio. In the past, the reported asset quality metrics for both segments have been range bound with overall GNPA between 1.0%-1.2% during March 31, 2014 to December 31, 2018. In fiscal 2019, due to slippage of a large exposure the GNPA had increased to 2.1% by March 31, 2019. Since then, the reported GNPA has remained steady, at 2.18% as on December 31, 2019. But, CRISIL's analysis of the top exposures comprising around 70% of the loan book indicate that the GNPA levels may go up. IndusInd still has exposure to a few stressed groups, although they remain standard accounts as they are receiving payments. In the corporate segment, the Bank has exposure to real estate developers, structured credit, and gems & jewellery segments, which are inherently vulnerable to an economic downturn and Covid-19 linked challenges. CRISIL notes that around 50% of the real estate exposures are towards under-construction projects. The Bank has also reported insignificant NPAs in both gems & jewellery and real estate developer segment so far. The Bank also has exposure to a large stressed telecom sector client, although the management believes that a large portion of exposure (which is in the form of non-fund based limits) may fall off in view of completion of underlying performance or obligation by the company.
 
Within retail segment, vehicle finance constitutes around 52% of the retail portfolio. Over the last two years, the GNPA in this segment has remained under control and ranged between 1.0 to 1.5%. However, in the light of economic slowdown and Covid-19 linked challenges, the vehicle portfolio could witness increase in delinquencies. Additionally, the impact on delinquencies in the microfinance portfolio (around Rs 20,000 crores as of December 31, 2019), where operations have been significantly disrupted, remains to be seen.
 
However, CRISIL notes that the Bank has managed recoveries from stressed accounts in the past. It previously had exposure to a large diversified conglomerate, wherein between June 30, 2019 and December 31, 2019, the bank was able to recover a substantial portion of the exposure by enforcing collateral and security. Therefore, while there could be slippages and the bank's overall GNPA may go up, the ability to get recoveries from the stressed/slipped accounts will be a key monitorable. Any increase in overall GNPA beyond 4% remains a key rating sensitivity factor.
 
While slippages are expected to be higher than that seen in the past, the earnings profile of the bank is comfortable marked by healthy pre-provisioning profits. The bank has continuously reported return on assets (ROA) of around 1.8% in the five fiscals between fiscal 2014 and fiscal 2018. In fiscal 2019 the bank reported ROA of 1.3% because of higher provisioning expense, while in the first nine months of fiscal 2020, bank reported an annualised ROA of 1.9%. This has been supported by healthy net interest margins (NIMs) at 4.0% for the first nine months ended December 31, 2019 as compared to 3.5% for fiscal 2019. NIMs have been supported by the acquisition of Bharat Financial Inclusion Ltd (BFIL). Additionally, the bank had a strong fee income of 2.4% in the first nine months of December 31, 2019 which has remained steady and has supported the earnings profile. Consequently, the banks pre-provisioning profits have remained comfortable which stood at Rs 7909 crore for the first nine months ended December 31, 2019. Over the past five fiscals, the credit costs have been in the range of 0.4% to 0.6% but was higher at 1.6% for fiscal 2019 and at 1.0% for the first nine months of fiscal 2020 due to the impact of a large financial conglomerate. Amidst the expectation of slippages, while credit costs could inch up, the banks pre-provisioning profits are healthy and should be able to absorb the increase in credit costs in the near term.
 
While the advances growth has been strong, the bank has also tried to shore up the resource profile with increasing share of deposits. The deposit base for the bank increased to Rs 2,16,713 crores as of December 31, 2019, up from Rs 1,94,868 crores as of March 31, 2019. However, the reliance on bulk deposits continues to remain high. While the CASA ratio of the bank stood at 42.4% as of December 31, 2019, there is some reliance on government savings accounts. Concentration in top 25 depositors is also high at 24% - the highest amongst the peers. As per LCR disclosure of December 2019, the retail and small business component in total deposits is low at less than 30% of total deposits; although it has shown an increase of 42% over the last one year. Additionally, since December 31, 2019, and especially post the moratorium announcement on a large private sector bank, the Bank has witnessed a reduction in overall deposits. However, the Bank has been able to tap other resources for its funding and liquidity. The Bank continues to focus on ramping up the deposit base by tapping other customer segments. Nevertheless, any subsequent significant withdrawals on the deposit front will remain a key rating sensitivity factor.
 
Capitalisation metrics of the bank remain strong as reflected in the comfortable CET1, Tier 1 and overall capital adequacy ratio (CAR) at 13.6%, 15.0% and 15.4% respectively as on December 31, 2019 as compared to 12.1%, 13.7% and 14.2%as of March 31, 2019. Further, networth stood at around Rs 34,156 crores as on December 31, 2019, providing adequate cushion against asset side risk with networth to net NPA ratio at 15.7 times. IndusInd's share price witnessed sharp drop between March 1 and March 25, 2020, much more than the broader Bank index. CRISIL notes that the recent sharp drop in share price has potentially reduced the ability to access equity markets due to low valuation. Persistent low market valuation may impede the ability to maintain cushion in CET1 ratio unless accompanied by curtailment in growth. The management believes that the current capital levels are adequate to support its growth for the next 2 to 3 years.
 
CRISIL's rating on the Tier I bonds (under Basel III) of IndusInd Bank is as per the criteria 'CRISIL's rating criteria for BASEL III-compliant instruments of banks'. CRISIL 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 maintaining sufficient CET1 capital cushion above the minimum regulatory requirements. The bank's eligible reserves to total assets remains comfortable at over 4%. Additionally, the bank has maintained healthy capitalization metrics with CET 1 ratio ranging between 14.0%-15.4% from March 31, 2016 till December 31, 2019 leading to an average CET1 capital buffer of 5.6% during the same period. The cushion over regulatory capital ratio along with high eligible reserves places the Bank in a comfortable position for servicing its Tier I bonds. A material reduction in this cushion would be a rating sensitivity factor for Tier I bonds.

For arriving at the ratings, CRISIL has evaluated the standalone business and financial risk profile of IndusInd Bank.

The bank's liquidity position is comfortable with liquidity coverage ratio at 113.57% as on December 31, 2019, against the regulatory requirement of 100%. CRISIL has noted that IndusInd has faced withdrawals in deposits from certain State Government entities - especially post the moratorium announcement on a large private sector bank. This has put some short-term pressure on deposits. However, as per management, the Bank's Liquidity Coverage Ratio (LCR) has remained at around 110%, even post deposit outflow, over the last one week. In the interim, till the market sentiment around deposits with private sector banks abate, IndusInd is focused on maintaining higher liquidity levels. In addition to excess statutory liquidity ratio (SLR), the Bank has tied up refinance limits and unutilised foreign currency lines. The Bank also has access to the inter-bank participation certificate (IBPC) market due to its high priority sector eligible vehicle finance and microfinance portfolio. With RBI's announcement on liquidity measures, it is expected the Bank's liquidity profile will further improve leading to increase in LCR. Nevertheless, any subsequent significant withdrawals on the deposit front will remain a key rating sensitivity factor.

CRISIL believes IndusInd Bank will maintain its healthy capitalisation and comfortable pre-provisioning profitability.

IndusInd Bank is a new-generation private-sector bank; it commenced operations in 1994. The bank has a pan-India presence, with around 4873 branches (including 2163 branches of BFIL) and 2721 automated teller machines (ATMs) as on December 31, 2019. It also has representative office in Dubai, Abu Dhabi and London. The bank has multilateral ties with other banks, ensuring access to more than 95,000 ATMs for its customers. It has four divisions: corporate and commercial banking, consumer banking, global markets group, and transaction banking.
 
For the first nine months ended December 31, 2018, profit after tax (PAT) was Rs 4,125 crore on total income (net of interest expense) of Rs 14,008 crore, as against PAT of Rs 2,941 crore on total income (net of interest expense) of Rs 10,702 crore in the corresponding period of the previous fiscal.
 
In fiscal 2019, PAT was Rs 3,301 crore on total income (net of interest expense) of Rs 14,492 crore compared to Rs 3,606 crore on total income (net of interest expense) of Rs 12,248 crore in fiscal 2018.

¹For Tier I bonds under Basel III

Any other information: Not applicable