The proposed AT1 perpetual debt instruments come
with a five-year call option (at the issuer's discretion), has a dividend
stopper clause, and is subordinated to the claims of Syndicate's depositors,
general creditors, and subordinated debt. The bank can make coupon payments at
its discretion from its revenue reserves (not created for specific purposes)
and from the credit balance in its profit and loss account, subject to meeting the
minimum regulatory capital requirements at all times, including the capital
buffer framework. The instruments are non-convertible, and come with a
non-viability trigger for a permanent principal write-off (to be decided by the
Reserve Bank of India) and a minimum core equity Tier-1 (CET1) trigger (5.5% until
31 March 2019 and 6.125% thereafter) for a temporary write-down of principal.
KEY RATING DRIVERS
The rating for Syndicate’s AT1 bond reflects the
bank’s standalone credit profile, along with its ability to service coupons, and
its lower equity requirement than most of its public sector banks’ (PSBs).
For AT1 instruments, the agency considers the 'discretionary component', 'coupon omission risk' and the 'write-down/conversion risk' as the key parameters to arrive at the final rating. The agency recognises the unique going-concern loss absorption features that these bonds carry and differentiates them from the bank's senior debt factoring in a higher probability of an ultimate loss for investors in these bonds.
Ind-Ra expects Syndicate to require INR35bn of equity, INR33bn of AT1 capital, and INR22bn of Tier 2 capital (assuming a 20% dividend pay-out ratio and 11% risk weighted asset growth) over the Basel III transition period (until FY19). If the government were to reduce its stake in the bank to 51% over FY16-FY19 from 69.2% currently, the bank can raise 10% of its current CET1 base at its current market capitalisation. In terms of the write-down risk, the agency estimates Syndicate to require equity amounting to 28% of its FY16 CET1 base, compared with a median of 47% for peer PSBs.
For the coupon omission risk, the agency compares the 'years of coupon serviceability' with assumptions on asset growth, return on asset (RoA) trajectory, and capital raising on estimated AT1 issuances over FY16-FY19. This measure takes into account the quantum of free reserves available for coupon distribution (i.e. revenue reserves and P&L balances) and compares the ability of an issuer to make coupon payments while meeting the minimum regulatory requirements for CET1, Tier 1, and total capital ratios at all times, subject to the requirements of capital buffer frameworks. In terms of coupon serviceability, Syndicate has a relatively high revenue reserve position (estimate for FY16: 2.9% of RWA; PSB median: 1.7%), which can cover a minimum of 30 years of coupon servicing at any time (it is among India’s top five PSBs, with a low likelihood of coupon deferral).
Syndicate’s standalone credit profile is better than most mid-sized PSBs’ in terms of its asset quality, while an improving liability profile is supporting its NIMs despite income reversals. Ind-Ra expects Syndicate’s impaired asset ratios to trend much lower than most peers’, owing to its lower exposure to the infrastructure sector (12% of loan book, including 3% for state electricity boards in 3QFY16, compared with 15%-20% for others). Even its exposure to the stressed corporate groups is lower than most PSBs’ in Ind-Ra’s assessment. Of the top 30 stressed corporates highlighted by Ind-Ra earlier (The INR1trn Dilemma of Indian Banking), Syndicate had just six overlapping names in its top 100 borrowers list. While the bank’s gross NPAs will inch up in 4QFY16, given the stress recognition planned (about 60% recognition of asset quality review due in 4QFY16), the overall impaired asset ratio (8.38% as of Q3FY16) is likely to remain lower than peers’ (11.5%-15% as of 3QFY16).
Ind-Ra had also earlier highlighted that PSBs would remain vulnerable to risks emanating from highly levered large corporate exposures, of which barely half have been recognised in headline impaired ratios. Consequent to the Reserve Bank of India’s action addressing some of these concerns, the median RoAs of PSBs would barely remain in the positive territory for FY16 with a few of them potentially clocking a loss for the full year. In this context, Ind-Ra expects Syndicate to report better operating performance (24bp in RoA for 9MFY16; FY15: 58bp), helped by its stable NIMs (2.3% in 3QFY16; 2.4% in FY15), which remain in line with the median ratios for similarly rated peers.
Syndicate is one of the few PSBs to gain market share in current account and savings account deposits (FY11: 2.3%; 1HFY16: 2.5%) and has lower reliance on wholesale term deposits than most peers’. On the liquidity front, Syndicate’s short-term asset funding gap improved to 17% in 1HFY16 from 30% in FY14, The bank’s liquidity coverage ratio was 115% in October 2015 (65% in 4QFY15).
information is available at www.indiaratings.co.in. The ratings above were solicited by, or
on behalf of the issuer, and therefore, India Ratings has been compensated for
the provision of the ratings.
Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.