By Jindal Haria

India Ratings and Research (Ind-Ra) has downgraded Corporation Bank’s (CB) Long-Term Issuer Rating to ‘IND AA-’ from ‘IND AA’. The Outlook is Stable. The instrument-wise rating actions are as follows:

Instrument Type

ISIN

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Basel III Compliant Tier 2 Bonds

INE112A08044

14 November 2017

8.02

14 November 2027

INR5

IND AA-/Stable

Downgraded

Basel III Compliant Tier 2 Bonds **

-

-

-

-

INR10

IND AA-/Stable

Assigned

Basel III Compliant Additional Tier 1 Bonds

INE112AO8010

 

19 February 2015

9.51

6 April 2018*

INR5

WD

Withdrawn (repaid in full)

Basel III Compliant Additional Tier 1 Bonds

1NE112A08028

24 March 2017

10.28

6 April 2018*

INR5

WD

Withdrawn (repaid in full)

*Call date
**Yet to be issued

KEY RATING DRIVERS

Minimum Sustainability Support-driven Rating: The downgrade reflects the impairment in CB’s ability to sustain its current position of systemic importance, with the possibility of a dip in its overall share of systemic assets and liabilities, mirroring the sharp deterioration in its asset quality. Ind-Ra expects CB’s stock of non-performing assets, restructured assets and overdue loans (in the special mention category) to result in substantial credit costs in FY19, although lower than FY18 (FY19E: 2.5%, FY18: 8.4%). Also, the capital infused by the government of India (GoI) in FY18, although substantial, is likely to prove inadequate and the bank would require a higher additional quantum to expand its lending operations. The downgrade to Ind-Ra’s support floor for public sector banks also reflects the possibility of the bank remaining under prompt corrective action for an extended period, due to its expected weak capital position and high non-performing assets in FY19. This could result in the bank continuing to cede its market share (either by not growing or by declining) in deposits and advances, and thereby its systemic importance.

Large Capital Requirement through FY19-FY20: CB’s capitalisation remains weak, despite regular infusions by the GoI. The bank reported a common equity tier 1 ratio of 5.7% at end-March 2018. Ind-Ra expects the bank’s credit costs to exceed the total capital that could be expected from the GoI and hence the capitalisation levels may not improve drastically. Ind-Ra expects the bank to remain under the prompt corrective active framework for at least one to two years. In the absence of additional tier 1 bonds, the tier 1 capital requirements must be met by equity capital. The agency expects the bank’s equity requirement of INR40 billion-50 billion to maintain its tier 1 capital at 9.5% by FY19. 

Asset Quality Overhang to be Severe and Persistent:
Ind-Ra expects CB’s asset quality to remain under pressure in FY19. Most of the exposures where S4A, SDR, 5:25, etc. were implemented could slip to non-performing category. In addition, slippages from other stressed but currently standard assets, restructured standard assets and haircuts on National Company Law Tribunal cases could cause the credit costs to remain elevated at 2%-3% annually till FY20. Ind-Ra also expects incremental slippages from the SMA1-SMA2 stock, which constituted about 3% of FY18 gross advances. As a result, Ind-Ra expects the capitalisation levels to remain under pressure over the next two years, unless the GoI infuses equity significantly higher than CB’s share in system’s advances and deposits.

Weak Standalone Profile:
The bank’s operating buffers are weaker than those of its peers on account of high credit costs and modest net interest margins. Its current account savings account ratio is also lower than the peers’. CB’s return on assets could remain in the negative territory over FY19-FY20.

Stable Liquidity:
The bank’s cumulative short-term liabilities exceeded short-term assets by 4% in FY18, indicating a marginal gap. At end-March 2018, CB’s liquidity coverage ratio was 147%, higher than the current regulatory requirement of 100%. 


RATING SENSITIVITIES

Negative: The bond rating has been linked to CB’s Long-Term Issuer Rating on Ind-Ra’s expectation of support from the GoI. The rating is at the agency’s support floor for public sector banks. There could be a revision in the support floor in case the agency perceives a change in the GoI’s support stance towards public sector banks.

Positive:
A rating upgrade is contingent on a significant improvement in the financial profile of the bank, including enhancement of the capitalisation buffers.


COMPANY PROFILE

CB had an operational branch network of 2,440 branches (FY17: 2,443 branches) and 3,122 ATMs (FY17: 3,169) as of FY18. At end-March 2018, the bank had advances share of about 1.6% and deposit share of about 1.5%.


FINANCIAL SUMMARY

Particulars

FY18

FY17

Total assets (INR billion)

2,218.91

2,478.91

Total equity (INR billion)

108.46

127.12

Net income (INR billion)

-40.54

5.61

Return on assets (%)

-1.7

0.2

CET1 (%)

5.7

8

Capital adequacy ratio (%)

9.2

11.3

Source: Company annual report.

The bank has withdrawn its Additional Tier 1 bonds of INR18 billion in FY19


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

17 October 2017

25 May 2017

25 April 16

Issuer rating

Long-term

-

IND AA-/Stable

IND AA/Stable

IND AA/Stable

IND AA/Stable

Basel III Compliant Tier 2 Bonds

Long-term

INR5

IND AA-/Stable

IND AA/Stable

IND AA/Stable

IND AA/Stable

Basel III Compliant Tier 2 Bonds

Long-term

INR10

IND AA-/Stable

-

-

-

Basel III Compliant Additional Tier 1 Bonds

Long-term

INR10

WD

IND A/Negative

IND A+/Negative

IND A+/Stable


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

Ind-Ra 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

    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