By Udit Kariwala

India Ratings and Research (Ind-Ra) has rated IndusInd Bank Limited’s (IBL) additional AT1 perpetual debt as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Proposed AT1 perpetual debt

-

-

-

INR10

IND AA/Stable

Assigned

The ‘IND AA’ rating on IBL’s AT1 bonds is a notch lower than its Long-Term Issuer Rating, due to the discretionary nature of AT1 coupons (according to Ind-Ra’s rating criteria). Ind-Ra envisages coupon deferrals and principal write down risk as a remote possibility in view of IBL’s diverse earnings profile, comfortable level of capitalisation and adequate distributable reserve buffers. 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 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. 

The Stable Outlook reflects Ind-Ra’s expectation that IBL’s would absorb any rise in credit cost in a stress case scenario through its reasonably strong operating profit buffers while maintaining its above-average Tier 1 capitalisation (December 2016: CET1 ratio of 14.7%). Additionally, IBL’s robust fee income profile reduces income volatility. On the funding side, the bank has shown a continuous improvement in its funding profile; however, its depositor concentration remains higher than its larger peers’. 

KEY RATING DRIVERS

Robust Pre-provision Operating Profit: IBL’s pre-provision profitability has been consistently improving. Pre-provision operating profit/average assets ratio increased to 3.32% in FY16 from 3.16% in FY15. Ind-Ra expects the bank to maintain the ratio at the FY16 level. IBL’s strong profitability is driven by its healthy asset yields in the retail segments, while it has gained market leadership in high-yielding segments such as two-wheeler vehicles. In addition, IBL continues to have a higher proportion of fee income in its total income than its peers’ on account of an entrenched business model in the mid-corporate sector including foreign exchange contracts and investment banking/non-fund-based facilities. Fee income to average assets ratio was 1.79% in FY16 compared to a median of 1.28% for peers.  

Concentrated Liability Profile:
 IBL’s proportion of bulk deposits in total deposits continues to be higher than its peers’. The bank has been taking various steps to diverse its resources profile by expanding its deposit base. The bank has been focussing on reducing its liability concentration by increasing its branch presence by over 19% to 1,075 over December 2015-December 2016. Ind-Ra believes the increasing retail footprint will start benefiting the bank from the next 24-36 months when most of its branches added recently will break-even and add to the operating leverage. The overall CASA book for the bank continues to grow at a robust pace (December 2015-December 2016: 46%) with a CASA ratio of 37.1% at end-December 2016 (December 2015: 35%). IBL’s funding profile is continuously improving; funding gap (cumulative one-year mismatch as % of average assets) was 4% at end-FY16 compared to the gap of 9.7% at end-March 2015. Any pick-up in the granular CASA deposits will be a key monitorable.  

Stable Asset Quality:
 IBL has consistently maintained stable asset quality through the recent cycles (gross NPL December 2016: 0.94%; December 2015: 0.90%). This is in contrast to the banking system’s gross NPL ratio, which surged to 7.6% as of March 2016, while private sector banks were at 2.7% on a blended basis. This, in the agency’s view, is underpinned by IBL’s established risk management systems along with loan origination and underwriting skills in the consumer finance business. As of December 2016, the loan against property segment constituted 6% of IBL’s total loan book (up 5.5% yoy). While the bank’s approach to this sector and customer segment is different from non-banking financial institutions, Ind-Ra expects this segment to see some pressure in light of rising delinquencies for non-banking financial institutions. 


RATING SENSITIVITIES

Positive: An increase in the franchise scale along with a considerable improvement in the liability franchise along with an even more granular funding mix while sustaining the current capital and operating buffers could result in a Positive Outlook. 

Negative:
 Significantly higher-than-expected deterioration in the asset quality, particularly if accompanied by higher-than-expected loan growth, which could dilute the capital buffers and impair the funding profile could lead to a Negative Outlook. 


COMPANY PROFILE

IBL is a new generation private bank that started operations in 1994. The bank is a significant player in financing commercial and other vehicles along with providing corporate working capital loans. IBL has regularly raised common equity in the past few years from markets at significant premiums due to its strong profitability. It reached an assets size of INR1.4 trillion in March 2016 with net profit of INR22.9 billion in FY16 and INR17.9 billion in FY15. At 3QFYE17, the bank had a network of 1,075 branches and 1,960 ATMs across the country.


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Outstanding Limits (billion)

Rating

7 December 2016

23 March 2015

18 April 2013

Issuer rating

Long-term

-

IND AA+/Stable

IND AA+/Stable

IND AA+/Stable

IND AA/Stable

Issuer rating

Short-term

-

IND A1+

IND A1+

IND A1+

IND A1+

Subordinated upper tier 2 bonds

Long-term

INR3.08

IND AA/Stable

IND AA/Stable

IND AA/Stable

IND AA-

Senior unsecured redeemable bonds

Long-term

INR5

IND AA+/Stable

IND AA+/Stable

IND AA+/Stable

-

Senior unsecured redeemable bonds

Long-term

INR15

IND AA+/Stable

IND AA+/Stable

-

-

AT1 perpetual debt

Long-term

INR10

IND AA/Stable

-

-

-


COMPLEXITY LEVEL OF INSTRUMENTS

Additional Tier I bonds are hybrid instruments with high complexity levels. AT1 bonds are perpetual instruments with built-in loss-absorbing features such as coupon discretion

For more information, visit
https://www.indiaratings.co.in/complexity-indicators.

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.

ABOUT INDIA RATINGS AND RESEARCH

India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

Headquartered in Mumbai, Ind-Ra has six branch offices located in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad and Kolkata. Ind-Ra is recognised by the Securities and Exchange Board of India, the Reserve Bank of India and National Housing Bank. 

India Ratings is a 100% owned subsidiary of the Fitch Group.

For more information, visit www.indiaratings.co.in.

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Analyst Names

  • Primary Analyst

    Udit Kariwala

    Associate Director
    Wockhardt Towers, Level 4, West Wing, Bandra Kurla Complex, Bandra (E), Mumbai :-400051
    +91 22 40001749

    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