By Jindal Haria

India Ratings and Research (Ind-Ra) has affirmed Canara Bank’s (Canara) Long-Term Issuer Rating at ‘IND AAA’, with a Stable Outlook. 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

Basel III Tier 2 instrument^

 

 

 

INR54

IND AAA/Stable

Affirmed

Basel III AT1 bonds*,^

 

 

-

INR40

IND AA/Stable

Affirmed

^Details in annexure

The affirmation of Long-Term Issuer Rating is driven by Ind-Ra’s expectation of the bank remaining systemically important and one of few public sector banks having some growth capital. Canara is the fourth-largest government-owned bank in India, the second-largest government-owned bank in Karnataka and fourth-largest government-owned bank in Kerala and Tamil Nadu by branch networks. Canara had a total of 4.7% deposit market share and 4.7% advances market share at end-March 2018. It received an equity infusion of about INR46 billion from the government in FY18. 

The rating on Canara’s AT1 bonds reflects the bank’s standalone credit profile, along with its ability to service coupons and manage principal write-down risk over the Basel III transition period. For AT1 instruments, the agency considers the 'discretionary component', 'coupon omission risk' and the 'write-down/conversion risk' as 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.

KEY RATING DRIVERS

Stronger Capitalisation Provides Buffer Against Credit Costs led Capital Erosion: Canara continues to be one of the better capitalised public sector banks (PSBs). Its common equity tier 1 (CET1) in 1QFY19 was 9.35% (FY17: 8.92%). Ind-Ra does not expect material proceeds from the sale of non-core assets or in the form of GoI infusions. The bank may be able to monetise its key non-core assets only at significant discounts to its expectations in the current adverse market conditions. The bank expects its CET levels to remain above the Basel III requirements; however in Ind-Ra’s assessment, the bank may need to raise INR10 billion-15 billion of Tier 1 capital assuming 6%-7% growth for each of FY19 and FY20. 

Canara also has a stronger distributable reserve position than most of its peers’ (FYE18: about 4.7% of risk weighted assets; PSB median: 3.8%), which can cover a minimum of 42 years of coupon servicing at any time, according to Ind-Ra. 

Standalone Profile not Expected to Deteriorate Further
: Canara’s standalone profile is supported by its higher than peers’ capital levels (aided by GoI infusion), ability to grow loan book and lower gross NPA levels than lower rated PSBs’. The bank’s net advances grew about 15% yoy (higher than peers’) in 1QFY19, on the back of growth in retail, agri and micro, small and medium enterprises. Canara is one of the few PSBs with capital levels that can enable the bank to grow its book; this is likely to aid the bank in terms of growing standard asset base and operating buffers to cover credit costs on the existing stock of advances. As with most PSBs, Canara witnessed credit costs of over 4% of average net advances in FY18, given the accelerated provisioning and proactive asset recognition as coaxed by the regulator. 

Improving Liability Engine:
On the liquidity front, Canara’s short-term funding gap (excess of liabilities over assets in the short term) is moderate at 16% of total assets in FY18. The bank has maintained its share of current account savings account over the last few years. The ratio has improved to 32.4% in 1QFY19 from 25.7% in FY16. The bank is deriving benefits from the new branches opened during FY13-FY17, more so outside of Karnataka. Ind-Ra expects the bank to maintain its share of deposits in the system. Its liquidity coverage ratio for 1QFY19 is 105.7%. 

Profitability Remains a Challenge:
The bank suffered a loss of about INR42 billion in FY18, on account of credit costs of about INR149 billion and treasury losses of about INR13 billion. Ind-Ra expects the bank to suffer lower credit costs in FY19 and FY20 (1.9%-2.1% for each in FY19 and FY20) than in FY18, but the levels would remain elevated. The agency estimates the bank may not have material profits in FY19 and FY20, as the stock of NPAs ages and other stressed assets (special mention accounts, accounts under 5/25 and restructured standard assets) may slip. The bank’s operating buffers (1.4% expected at steady state) could be consumed by credit costs over the next two years. The adverse interest rate conditions could also, in the agency’s assessment, result in losses of about INR10 billion in the investment portfolio. The bank could also witness another INR10 billion of provisioning costs towards transition to Ind-AS in FY20, in case Ind-As is implemented from FY20. 


RATING SENSITIVITIES

Negative: Canara’s Long-Term Issuer Rating and the Basel III Tier 2 bond rating, which has been linked to the former, have been derived from Ind-Ra’s expectation of support from the GoI, and is unlikely to change, unless there is a change in the GoI’s support stance. 

The rating of AT1 bonds has been linked to the standalone credit profile and could be downgraded in case of a significantly higher-than-expected decline in the asset quality, if not buffered by timely equity support, leading to a significant dilution in the bank’s capability to absorb losses.


COMPANY PROFILE

Canara has a pan-India presence, with the third-largest network of 6,291 domestic branches in 1QFY19. 60% of its branches are based in rural and semi-urban areas, supporting the GoI’s initiative of banking for all. It is fifth-largest government bank by the total assets in India. 

FINANCIAL SUMMARY
 

Canara Bank-Standalone

Particular

FY18

FY17

Total assets (INR billion)

6,168.9

5,835.2

Total equity (INR million)

3,560.5

3,368.6

Net income (INR million)

-42.,2

11.2.

Return on assets (%)

-0.75

0.20

CET1 (%)

9.51

8.92

Capital adequacy ratio (%)

13.22

12.86

Source: Company annual report


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

3 August 2017

26 October 2016

17 December 2015

Issuer rating

Long-term

-

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

Basel III Tier 2 instrument

Long-term

INR54

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

Basel III AT1 bonds

Long-term

INR40

IND AA/Stable

IND AA/Stable

IND AA/Stable

IND AA/Stable

ANNEXURE

Instrument Type

ISIN

Issue Size (billion)

Date of Allotment/Issuance

Outstanding (billion)

Coupon Payment Frequency

Coupon rate/Interest Rate (%)

Principal Payment Due Dates

Instrument Maturity Date

BASEL III TIER II Bonds 2015-16 (Series I)

INE476A09264

INR15

31 December 2015

INR15

Annual

8.4

31 December 2025

31 December 2025

BASEL III TIER II Bonds 2015-16 (Series II)

INE476A08043

INR9

7 January 2016

INR9

Annual

8.4

7 January 2026

7 January 2026

BASEL III COMPLIANT ADDITIONAL TIER 1

INE476A08035

INR15

5 March 2015

INR15

Annual

9.55

Perpetual Bond - Call Option-
5 March 2025

Perpetual

BASEL III COMPLIANT TIER II Bonds 2016-17

INE476A08050

INR30

27 April 2016

INR30

Annual

8.4

27 April 2026

27 April 2026

BASEL III COMPLIANT ADDITIONAL TIER I

INE476A08068

INR10

13 December 2016

INR10

Annual

8.6

Perpetual Bond - Call Option-
13 December 2021)

Perpetual


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels 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.

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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. 

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Analyst Names

  • Primary Analyst

    Jindal Haria

    Associate 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