By Jindal Haria

India Ratings and Research (Ind-Ra) has affirmed IndusInd Bank Limited’s (IBL) Long-Term Issuer Rating at ‘IND AA+’ with a Stable Outlook and Short-Term Issuer Rating at ‘IND A1+’. 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

Subordinated upper tier 2 bonds#

-

-

-

INR3.08

WD

Withdrawn (paid in full)

Senior unsecured redeemable bonds#

-

-

-

INR20

IND AA+/Stable

Affirmed

AT1 perpetual debt#

-

-

-

INR20

IND AA/Stable

Affirmed

#Details in annexure

The affirmation factors in IBL’s consistent and strong profitability, diversified income profile, leadership positions in some of the asset classes, and higher than peers’ core capital levels, which together provide the bank with ability to absorb credit costs under Ind-Ra’s stress tests. The bank has shown a continuous improvement in its funding profile; however, its depositor concentration remains higher than that of the larger private banks.

KEY RATING DRIVERS

Robust Pre-provision Operating Profit; Could Get Asset Mix Boost: IBL’s pre-provision profitability has been consistently improving (9MFY18: 3.4%; FY13: 2.8%), primarily driven by its consumer finance portfolio and multi-product approach towards corporate portfolio. The bank aims to change the portfolio mix (corporate:retail is 60:40) to 50:50 in favour of high-margin consumer finance (it has market leadership in commercial vehicles and two-wheeler financing). The bank also has a stable and higher than peers’ non-interest income as a percentage of gross income; (IBL’s 35%-40%; peers’ 25%-40%), driven by its foreign exchange and investment banking businesses. Also, the bank expects its proposed Bharat Financial Inclusion Limited’s (BFIL) acquisition to be RoA additive (9MFY18: 1.9%, FY17: 1.8%). The merger will result in release of cash on balance sheet’ of BFIL, lower the capital requirement on BFIL’s microfinance portfolio, increase the portfolio’s ability to lever and provide it with access to about 7 million new customers. 

Concentration in Liability Profile Could Reduce:
IBL’s depositor concentration has decreased with the top 20 depositors accounting for 21% in 1HFY18 (FY16: 32%), it is higher than its peers’. IBL’s proportion of bulk deposits in total deposits, although declining, continues to be higher than its peers’. The bank has been taking various steps to diverse its resources profile by expanding its deposit base and focusing on granular deposits. The bank plans to achieve this by leveraging their expanded physical reach (9MFY18: 1,320 branches; FY14: 605 branches), led by growth in semi urban and rural branches, digital channels that it has invested in and differentiated deposit products and services. Ind-Ra believes the increasing retail foot print will benefit the bank materially in the next two years when most of its newly added branches would undergo reasonable seasoning. 

Low-cost Deposit Traction:
The bank’s current and savings account (CASA) deposits increased at 30%-33% CAGR in the last five years compared to 24%-26% CAGR in total deposits and resulted in an improvement of CASA to 42.9% in 9MFY18 from 29% in FY13 at almost steady deposit to liabilities ratio. However, the bank’s short-term funding gap (short-term assets less short-term liabilities divided by total assets) is about 9% in FY17 (FY16: 4%); this gap ranges from surplus to 10% for peers and higher rated banks. Substantial pick-up in the granular CASA deposits, the funding gap and the depositor concentration will be key monitorables. 

Stable Asset Quality
: IBL’s track record of asset quality is among the superior and consistent. Its gross NPA has been in the range of 0.8%-1.2% for over last five years while credit costs (provision for NPAs to total assets) have remained in the 0.2%-0.4% range. The bank also does not have a significant exposure to stressed corporates, unlike most other private and public banks. It focuses on mid and small corporates and consumer finance (especially vehicle loans) where it has substantial experience and can exert reasonable control. Ind-Ra expects that the bank could face asset quality pressures on the SME portfolio, given the evolving economic and compliance regime. However, IBL’s track record in terms of originating and managing the asset quality could mitigate the aforementioned risks. The bank also has substantial exposure to the gems and jewellery (5.4% of the loan book at end-December 2017) sector, mostly through assessed bank limits and does not expect significant credit costs from this sector. 

Merger with BFIL Could Provide Opportunities as well as Risks:
The proposed BFIL merger provides the bank access to a large customer base, opportunities to cross sell both asset and liability products and ability to meet priority sector norms easily. The fact that BFIL is diversified, large, among the lowest rate microfinance lenders with superior asset quality, systems, processes and vintage could mitigate some of the typical risks that the microfinance sector is typically exposed to; however, microfinance (direct or indirect) could become one of the large segments in the overall loan portfolio. Ind-Ra’s stress tests indicate that the bank’s profitability buffers would be adequate to withstand event-led risks in the sector.

Cost Control to Drive Incremental Profitability:
IBL reported a higher operating cost (operating cost/average assets) of 2.9% on average than peers’ 2%-3% from FY15-FY17, due to its expansion, high touch customer segments and branch and dealer driven sourcing model. The bank in its planning cycle FY18-FY20 plans to focus on reducing operating costs, personnel per branch and branch sizes and leverage technological channels for new customer acquisition and digitising back-end processes. The bank is in the high yield segment that, in the agency’s view, is getting competitive with the entry of large banks and small finance banks. Hence, incremental profitability (in % terms) would also be a consequence of the bank’s ability to reduce operating costs. 


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 INR2 trillion in December 2017 with net profit of INR26.5 billion in (FY17: INR28.7 billion). At 3QFYE18, the bank had a network of 1,320 branches and 2,162 ATMs across the country. 


FINANCIAL SUMMARY 
 

Particulars

FY17

FY16

Total assets (INR billion)

1,786.48

1,428.97

Total equity (INR billion)

206.46

176.96

Net profit (INR billion)

28.68

22.86

Return on assets (%)

1.78

1.80

Common equity tier 1 (%)

14.02

14.92

Capital adequacy ratio (%)

15.31

15.50

Source: Company, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

31March 2017

23 March 2015

18 April 2013

Issuer rating

Long-term/ Short-term

-

IND AA+/Stable/ IND A1+

IND AA+/Stable/ IND A1+

IND AA+/Stable/ IND A1+

IND AA/Stable/IND A1+

Subordinated upper tier 2 bonds*

Long-term

INR3.08

WD

IND AA/Stable

IND AA/Stable

IND AA

Senior unsecured redeemable bonds

Long-term

INR20

IND AA+/Stable

IND AA+/Stable

IND AA+/Stable

-

AT1 perpetual debt

Long-term

INR20

IND AA/Stable

IND AA/Stable

-

-

*ISIN details are awaited from the issuer

ANNEXURE

ISIN

Instrument

Date of Issue

Coupon Rate (%)

Maturity Date

Issue Size (billion)

Rating/Outlook

INE095A08041

Senior unsecured redeemable bonds

31 March 2015

8.8

31 March 2022

INR5.0

IND AA+/Stable

INE095A08058

Senior unsecured redeemable bonds

9 December 2016

7.6

9 December 2026

INR15.0

IND AA+/Stable

 

Total

 

 

 

INR20.0

 

ISIN

Instrument

Date of Issue

Coupon Rate (%)

Maturity Date

Issue Size (billion)

Rating/Outlook

INE095A08066

AT1 perpetual debt

22 March 2017

9.5

Perpetual

INR10.0

IND AA/Stable

INE095A08074

AT1 perpetual debt

18 July 2017

9.5

Perpetual

INR10.0

IND AA/Stable

 

Total

 

 

 

INR20.0



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. 

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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

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121