By Jinay Gala

India Ratings and Research (Ind-Ra) has affirmed The South Indian Bank Limited’s (SIB) Long-Term Issuer Rating at ‘IND A+. The Outlook is Stable. The instrument-wise rating actions are as follows:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Lower Tier II subordinated debt*

-

-

-

INR2

IND A+/Stable

Affirmed

Basel III Tier 2 debt*

-

-

-

INR10

IND A+/Stable

Affirmed

* Details are given in Annexure below

The ratings reflect SIB’s reasonable stress tolerance capability bolstered by its adequate common equity Tier 1 capital (2QFY18: 10.4%, median of peers: 10.5%), stable retail liability franchise (83.5% of total deposits) and comfortable liquidity with largely matched assets-liability tenors. Ind-Ra expects incremental slippages to moderate in large corporates with major stress having being accounted; although small and medium enterprise books’ asset quality is under pressure and needs to be monitored. Having said that, the credit cost pressure is likely to continue for few more quarters. The ratings, however, are constrained by SIB’s subdued operating efficiency, lower profitability (return on assets FY17: 0.57%), higher total stressed assets vis-a-vis equity (net non-performing assets + restructured assets + security receipts) to net worth ratio (FY17: 53.6%) and lower provision cover than peers’.
 

KEY RATING DRIVERS

Incremental Slippages on Corporates Should Moderate:  Ind-Ra believes slippages will become moderate as stress in the legacy corporate book has been largely accounted for. However, there would be an elevated provision (provision coverage ratio FY17: 28.8%, FY16: 24%, FY15: 44.5%) impact due to ageing of non-performing assets, which could drive credit cost higher and impair profitability in the medium term. The bank plans to increase focus on smaller exposure than large consortium accounts to reduce concentration risk. The banks initiative to improve its internal credit standards by assigning risk-based evaluation on internal classified stress sectors is a positive.

Reasonable  Capitalisation: SIB’s capitalisation, although reasonable , has weakened over the last five years (FY17 Basel 3Tier 1: 10.9%, FY13: 12.0%), driven by a decline in internal accruals (7.4%, 18%) on account of higher credit cost and a fall in the proportion of gold loans (2.8%, 17.4%) which carry a lower risk weight. The bank successfully raised INR6.3 billion of equity through a rights issue in February 2017, thereby bolstering waning capital levels. Ind-Ra estimates the bank’s Tier 1 capital requirement of INR8.5 billion by end-March 2019 (risk weighted asset growth assumption CAGR 15%) to transition into the Basel III regime, which can be met through internal accruals provided credit cost remain under control or through market issuance.

Stable Liability Franchise: Even though Current Account, Saving Account has been stable and was at 24.6% in 2QFY18, growth in Current Account, Saving Account franchise needs to be demonstrated. The NRI deposit to total deposit stood at 26.6% at 2QFY18 (FY15:21.9%). Although the bank has shown stability in market share (10% in 2QFY18) of NRI remittances in Kerala, especially from the Middle Eastern countries historically, any pressure emanating from the uncertainty on remittances from gulf could pose challenges. Ind-Ra expects the bank to also face incremental competition from small finance banks for deposits over the near to medium term.

Weak Profitability and Operational Efficiency: Of the bank’s 851 branches as on 2QFY18, 35% branches are below breakeven (advances < INR150 million), leading to a significant operational overhang. Thus, the resultant low operating buffers and high credit costs could increase pressure on SIB’s profitability.

Retail to Remain Core Focus: The bank aims at driving incremental loan growth from small and medium enterprise, and retail segments (46.9% of total loan book at 2QFY18), while leveraging these relationships for cross-selling and new marketing initiatives by appointing business development officers. SIB also recruited a new country head for retail banking from a larger commercial bank in FY18 to drive retail strategy focussing largely on acquisition and improving branch monitoring and efficiency.

However, the bank could face significant competition in these segments from small finance banks and other commercial banks. The bank also plans to proactively leverage digital technology to attract young customers and improve its liability profile. Having said that, SIB’s ability to meaningfully improve the liability franchise and profitability buffers will be a key rating driver over the medium term.
 


RATING SENSITIVITIES

Negative: A continued decline in the operating performance driven by asset quality pressures or a weakening liability franchise could lead to a negative rating action. Also, high growth with lower capital buffers would also act as a rating trigger.

Positive: A consistent improvement in the low-cost retail liability franchise, improvement in branch utilisation, moderation of slippages along with credit cost and improvement in profitability could result in a positive rating action. 


COMPANY PROFILE

SIB is a major private sector bank headquartered at Thrissur in Kerala, India.  It has 851 branches, four service branches, 48 external counters and 20 regional offices spread across more than 27 states and three union territories in India.

FINANCIAL SUMMARY

 

Particulars

FY17

FY16

Total assets (INR billion)

743.1

634.7

Total net worth (INR billion)

48.5

38.4

Net profit (INR billion)

3.93

3.33

Return on assets (%)

0.57

0.55

CET1 ratio (%)

10.88

9.83

Capital adequacy ratio (%)

12.37

11.82

Source: SIB, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

26  October 2016

18 March 2015

Issuer rating

Long-term

-

IND A+/Stable

IND A+/Stable

IND A+/Stable

Lower Tier II subordinated debt

Long-term

INR2

IND A+/Stable

IND A+/Stable

IND A+/Stable

Basel III Tier 2 Debt

Long-term

INR10

IND A+/Stable

IND A+/Stable

IND A+/Stable

ANNEXURE

Instrument Type

ISIN

Date of Allotment

Maturity Date

Coupon rate (%)

Size of Issue (billion)

Rating/Outlook

Rating Action

Basel III Compliant Tier 2 Debt

INE683A08028

30 September 2015

31 October 2025

10.25

INR3

IND A+/Stable

Affirmed

Unutilised limit

INR7

IND A+/Stable

Affirmed

Total Basel III Compliant Tier 2 Bonds

INR10

Lower Tier II subordinated debt

INE683 A0909

20 August 2009

20 April 2020

9.75

INR2

IND A+/Stable

Affirmed


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please 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, structured finance 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.

DISCLAIMER

ALL CREDIT RATINGS ASSIGNED BY INDIA RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.INDIARATINGS.CO.IN/RATING-DEFINITIONS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.INDIARATINGS.CO.IN. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. INDIA RATINGS’ CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE.

Analyst Names

  • Primary Analyst

    Jinay Gala

    Associate Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th Floor, West Wing, Bandra Kurla Complex, Bandra East,Mumbai - 400051
    +91 22 40356138

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121