By Jindal Haria

India Ratings and Research (Ind-Ra) has assigned Syndicate Bank’s (Syndicate) INR16bn Basel III compliant Tier 2 bonds an ‘IND AA+’ rating with a Stable Outlook and its certificates of deposit of up to INR200bn an ‘IND A1+’ rating.

The agency already has an ‘IND AA’ rating with a Stable Outlook on Syndicate’s INR18bn Basel III compliant Tier 1 bonds.

 

KEY RATING DRIVERS

The ratings of Syndicate’s Basel III compliant Tier 2 bonds and certificates of deposit reflect its systemically important position and Ind-Ra’s expectation of strong continuous support from the government of India. It is the eighth-largest public sector bank (PSB) in India by assets and has the third-largest bank branch network in Karnataka, according to Ind-Ra. Syndicate also has 3% share of the banking system’s advances and deposits. The government of India and Life Insurance Corporation infused INR7.4bn and INR2.2bn, respectively, into the bank in FY16. The bank also raised INR8.7bn of Additional Tier 1 bonds and INR17.5bn Tier 2 bonds in FY16. 

Syndicate’s standalone credit profile compares well with most mid-sized public sector banks’ (PSBs) in terms of asset quality.
Of the top 30 stressed corporates highlighted by Ind-Ra in its report The INR1trn Shortfall from Distressed Corporates, Syndicate had just eight overlapping names in its top 100 borrowers list, most of which were classified as gross NPAs in 2HFY16. While the bank’s gross NPAs (FY16: 6.7%, FY15: 3.1%) could inch up in FY17, the overall impaired asset ratio (9.2%, 7.6%) is likely to increase only marginally and remain lower than peers’ (10%-12%, 8%-11%). 

With the exception of FY16, the bank has consistently reported higher accruals than its peers over the last five years which supports its standalone profile. According to the management, the bank has also proactively made provisions for its exposure to most of the corporates listed by the Reserve Bank of India in its asset quality review for some other PSBs as well in 2HFY16. 

Syndicate is one of the few PSBs to gain market share in low-cost current and savings account deposits in the last five years (FY11: 2.3%; 1HFY16: 2.5%). Although the bank’s liquidity coverage ratio for FY16 seems comfortable at 125%, its short-term asset funding gap has not improved (30% in FY14-FY16) and is among the six highest gaps for PSBs. The 
certificates of deposit proposed to be raised are primarily aimed at improving profitability and could widen its funding gaps. 

The bank uncovered the fraud linked to cheque discounting in three of its branches in Rajasthan, which was committed in connivance with some employees. Consequently, it made the requisite provision of INR8.8bn fully in 4QFY16. The bank has strengthened its internal controls and has set up a Fraud Risk Management Department to identify and plug such gaps across the bank. Also, Syndicate has reset approval matrices and authorisation levels, instituted mandatory rotations and leaves for branch employees among other institutional measures to strengthen checks post the discovery of the fraud. 

Ind-Ra expects Syndicate to require INR52bn of equity, INR10bn of AT1 capital, and INR16bn of Tier 2 capital (assuming a 20% dividend 
pay-out ratio and 9.5% risk weighted asset growth planned by the bank) 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% (adjusted) currently, the bank can raise 16% of its current CET1 base at its current market capitalisation.  In Ind-Ra’s opinion, the capital requirement is significant and the bank may be required to further moderate its growth plans if equity is not forthcoming. 


RATING SENSITIVITIES

Negative: The rating of Syndicate’s Basel III tier-2 instruments is linked to Ind-Ra’s expectation of support from the government and is unlikely to change unless there is a change in the government’s support stance.


COMPANY PROFILE

Syndicate is headquartered in Bangalore and had 3,765 branches at FYE16.

Instrument Features:
The Tier 2 bonds have a maturity period of 10 years with a call option at the end of five years, and are subordinated to the claims of depositors, general creditors and senior to investors in Tier 1 or equivalent instruments. The instruments are non-convertible in nature and come with a point of non-viability trigger for a permanent principal write-off (to be decided by the Reserve Bank of India).



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