By Jindal Haria

India Ratings and Research (Ind-Ra) has downgraded Corporation Bank (CB)’s Long-Term Issuer Rating to ‘IND AA’ from ‘IND AA+’. The Outlook is Stable. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS

Ind-Ra has downgraded CB’s Long-Term Issuer Rating to its support floor of ‘IND AA’, which reflects deterioration in CB’s asset quality, and continued weakness in its funding profile, leading to weakening of its profitability and capital buffers, well below its ‘IND AA+’ peers’. However, Ind-Ra expects continued support from the government of India (GoI), and therefore the rating outlook at the support floor remains Stable. The support stance is driven by the GoI’s majority ownership (67.2% at end-December 2015), its equity infusion of INR8.57bn in FY16 and CB’s systemic importance, with a 2.1% market share in advances as at end-September 2015. The rating on the Additional Tier-1 (AT1) bonds reflects the bank’s standalone credit profile, its ability to service coupons and its relative equity requirement over the Basel transition period; the rating movement mirrors the change in the standalone rating for the bank. 

The standalone credit profiles of most public sector banks (PSBs) have seen the impact of the Reserve Bank of India's recent action addressing risks emanating from highly levered large corporate exposures of banks. Ind-Ra had earlier
highlighted that PSBs remain vulnerable to pressures on credit costs owing to limited recognition of the stress in corporate lending in their respective headline impaired ratios until now. The incremental stress recognition took CB’s gross non-performing assets (NPAs) to 7.32% as at end-December 2015 (FY15: 4.81%), much higher than its ‘IND AA+’ rated peers’. This is likely to inch up further to above 8.0% in 4QFY16 as some more stress gets recognised. 

Persistent high funding costs have compressed CB's pre-provisioning operating profit buffers available to cover its credit costs; the buffers are closer to the median of ‘IND AA’ peers. Moreover, CB has low provision coverage of 37% (56.4% including technical write-offs) compared with ‘IND AA+’ peers. Ageing of its non-performing loans and additional slippages from lumpy large corporate accounts could increase credit costs further (9MFY16: 1.5% of assets; FY15: 1.1%) and pressure profitability. 

CB’s dependence on bulk deposits remains high (47% of deposits in December 2015; FY15: 51%), and the proportion of low-cost current account and savings account deposits (CASA) (December 2015: 19.75%; FY15: 19.72%) has remained stagnant, despite various initiatives by the bank. CB has consistently lost CASA market share in the past four years (FY11: 1.6%; 1HFY16: 1.3%). The bank’s franchise is largely in the southern states (45% of branch network), which are highly competitive markets and Ind-Ra believes that building a strong liability base could remain challenging for the bank. If loan growth picks up over the medium term, without a corresponding improvement in CASA, the dependence on bulk deposits could remain at higher levels, impacting CB’s funding costs and profitability buffers. 

CB’s capitalisation (December 2015 CET1: 7.54%) is comparable to other large government banks’, and this has remained stable largely on account of low loan growth in the past two years. Ind-Ra estimates that the bank will require total equity injection of INR106.7bn through the Basel III implementation period to maintain a CET1 ratio of 8.0% and a total capital ratio of 11.5% (both including the capital conservation buffer), assuming a loan growth of 11%. Of this, INR41.7bn is likely to be common equity, which is around 45% of the bank's current CET1. After accounting for government shareholding, Ind-Ra believes the capital requirement from external investors is high and could be challenging for the bank. 

Subsequent to the asset quality review provisions, CB’s revenue reserves have depleted considerably, weakening its coupon serviceability in terms of free and eligible reserves and distance to trigger (CET1 buffer over the mandated ratios, including capital conservation and other buffers) over FY16-FY19. The risk of a coupon deferral will depend upon continued equity injection by GoI and an improvement in the bank’s profitability over the life of the instrument.


RATING SENSITIVITIES

A Positive Outlook would result from a significant improvement in CB’s funding profile and asset quality, resulting in a sustained improvement in profitability. The rating on the AT1 instrument could be upgraded if the bank improves its capital and profitability buffers leading to better coupon paying ability and lower write-down risks. 

A negative rating action on the Long-Term Issuer Rating and Tier-II instruments aligned to it, while unlikely in the near term, would result from a change in GoI’s support stance. 

A negative rating action on the AT1 instruments could result from the 
absence of equity infusion by GoI, further deterioration in its asset quality impacting its profitability buffers and hampering its coupon paying ability.  


COMPANY PROFILE

CB is a medium-sized PSB headquartered in Mangalore, Karnataka. As at end-December 2015, the bank had 2399 branches, nearly 47% of which are in southern India. 

CB’s ratings: 
- Long-Term Issuer Rating: downgraded to ‘IND AA’ from ‘IND AA+’; Outlook Stable
- INR5bn Tier-II bonds: downgraded to ‘IND AA’ from ‘IND AA+’; Outlook Stable
- INR10bn AT1 instrument: downgraded to ‘IND A+’ from ‘IND AA-’; Outlook Stable 



SOLICITATION DISCLOSURES

Additional 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. 

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Analyst Names

  • Primary Analyst

    Jindal Haria

    Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001750

    Secondary Analyst

    Abhishek Bhattacharya

    Director and Co Head Corporates
    +91 22 40001786

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121