By Jindal Haria

India Ratings and Research (Ind-Ra) has taken following rating actions on Syndicate Bank’s (Syndicate) debt instruments:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Basel III-complaint Tier 2 bonds*

-

-

-

INR16

IND AA/Negative

Affirmed; Outlook revised to Negative from Stable

Basel III AT1 perpetual bonds*

-

-

-

INR38

IND A+/Negative

Downgraded

Certificate of deposits

-

-

7-365 days

INR150

IND A1+

Affirmed

* Details are given in annexure table

Analytical Approach: The Long-Term Issuer Rating of Syndicate is support driven. Ind-Ra expects continuous support from the government of India (GoI) in light of its status as a majority government-owned bank. 


The Negative Outlook reflects Syndicate’s significantly deteriorated capitalisation levels, weak asset quality leading to high credit costs which are likely to continue and weak operating parameters over FY19-FY20. While the GoI has infused fresh capital of INR23.60 billion in Syndicate in FY19, Ind-Ra believes that this may not be adequate to meet the minimum core equity Tier I (CET1) capital requirements by March 2019 (even after considering the 0.625% capital conservation buffer (CCB) deferral to FY20). In Ind-Ra’s assessment, the bank needs at least INR10 billion more (in addition to INR5 billion proposed to be raised from the employees) to meet the minimum CET1 and Tier1 capital requirements in FY19-FY20. For FY19, the capital requirements are CET I at 5.50%, CCB at 1.88% and additional tier 1 at 1.5%. For FY20, CCB increases to 2.5% with all other parameters remaining the same.   


The downgrade in ATI debt reflects Syndicate’s worsening standalone credit profile on account of credit costs because of ageing of non-performing assets (NPA) that would impact profitability further. The bank would either witness marginal capital erosion or capital consumption. For the AT1 debt, the agency considers discretionary component, coupon omission risk and write-down/conversion risk as the key parameters to arrive at the ratings. The agency recognised the unique going-concern loss absorption features that these bonds carry and differentiated them from the bank's senior debt factoring in a higher probability of an ultimate loss for investors in these bonds. The rating for the bank’s AT1 bond reflects the bank’s standalone credit profile, along with its ability to service coupons, and its equity requirement to avoid write-down triggers compared to other public sector banks’ (PSBs).

The affirmation reflects Syndicate’s moderate systemically important position and Ind-Ra’s expectation of continuous support from the GoI. It is the seventh-largest PSB in India by assets and has the third-largest bank branch network in Karnataka. In FY18, the GoI infused INR28.39 billion in Syndicate (FY17: INR7.8 billion, FY16: INR9.6 billion – GoI and Life Insurance Corporation of India together), however, the capital infusion was absorbed to fund the losses and its capitalisation remains weak (CET1; 1HFY19: 6.04%).

KEY RATING DRIVERS

Capitalisation to Remain around Regulatory Minimum Levels till FY20: Syndicate’s CET I deteriorated to 6.04% in 1HFY19 from 7.56% in FY18 (FY17: 7.5%), mainly due to high credit costs on account of ageing NPA impact. While the bank received an equity infusion from the GoI in 9MFY19 and it proposes to raise INR5 billion from its employees, this may fall short of at least INR10 billion to meet minimum capital requirements in FY19. Furthermore, the likely modest accruals in FY20 may not be adequate to bring CET1 to 8% by FY20 without external assistance. The bank’s risk weighted assets to total advances is lower than most peers’ and hence the pace of reduction in risk weighted assets may be lower than peers. Ind-Ra believes Syndicate’s distributable reserves as a proportion to risk weighted assets were 3.7% in FY18, however, they are likely to deplete materially owing to credit costs that would be incurred in FY19.

Credit Costs to Remain High:
Ind-Ra continues to factor in increasing pressure on the bank’s profitability on account of the additional provisioning requirement to ageing NPA. In Ind-Ra’s assessment, the stock of stressed corporates with low provisioning remains higher for Syndicate than similar rated peers’ – as evident by the composition of non-performing loans, with substandard and D1 assets combined accounting for 50% of non-performing loans compared with the peer median of 24% in FY18. This is also reflected through a modest provisioning coverage (excluding D3 and loss assets) of 43% in FY18. Ind-Ra expects Syndicate’s credit costs (FY18: 371bp; FY17: 177bp; FY16: 180bp) to remain elevated at around 220-240bp in FY19 and 150-200bp in FY20, especially as provision catches up. This will add to the pressure on profitability, limit the ability of internal accruals to add to capital and make external equity infusions critical. A part of the credit costs expected in FY19 could be offset by treasury gains / loss recoveries in the short term, as interest rates have cooled off over the last few months.

The fresh slippages from corporates are likely to be modest. While the fresh slippages in the MSME portfolio could benefit from the
RBI dispensation on stress recognition, slippages in the agriculture segment could add to the NPA pool. 

Liquidity and Funding Weaker than Peers’:
Over FY13-1HFY19, Syndicate’s current account and saving account (CASA) deposits share dropped to around 2.0% in 1HFY19 from 2.3% in FY13, in line with most of the PSBs. However, the bank’s CASA ratio increased to 33.46% in 1HFY19 from 30.41% in 1HFY18. Over FY19 and FY20, intensifying competition for deposits in the bank’s core catchment from new private sector banks and PSBs with ability to lend is likely to impact the pace of retail deposit accretion. The bank has been taking conscious efforts towards reducing its high-cost bulk deposits; however, the same remained high at 6.6% of the total deposits at end-September 2018 (June 2018: 6.6%; June 2016: 21.6%), which is higher than peers’.  

Its short-term (one year) asset liability mismatches as of March 2018 at 25% (FY16-FY17: 30%-35%) were higher than similar rated peers’. The
liquidity coverage ratio was 159.52% in 2QFY19, well above the regulatory requirement of 90%.


RATING SENSITIVITIES

Negative: The long-term ratings are linked to Ind-Ra’s expectation of continuous support from the GoI to maintain the minimum levels of regulatory capital; hence, any change in the agency’s opinion regarding GoI’s support stance could lead to a further negative rating action. Additional material deterioration in the asset quality, less-than-adequate equity infusion or a sizeable loss of franchise could lead to deterioration in the standalone profile and thereby negative rating actions on the rating of AT 1 bonds. 

Positive:
A Positive Outlook, although unlikely in the short term, would result from a significant improvement in the bank’s capital and profitability buffers. 


COMPANY PROFILE

Headquartered in Bangalore, Syndicate is a PSB in India, with 4,012 domestic branches as of end-March 2018.

 

FINANCIAL SUMMARY

Particulars

FY18

FY17

Total assets (INR million)

3,239,771

2,990,733

Total equity (INR million)

149,418

141,842

Net profit (INR million)

-3,2228

3,589

Return on assets (%)

-1.05

0.12

CET1 (%)

7.56

7.50

Capital adequacy ratio (%)

12.24

12.03

Source: Bank

 

 



RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (INR billion)

Rating

21 December 2017

20 October 2016

23 February 2016

Basel III-complaint Tier II bonds

Long-term

INR16

IND AA/Negative

IND AA/Stable

IND AA+/Stable

-

Basel III AT1 perpetual bonds

Long-term

INR38

IND A+/Negative

IND AA-/Stable

IND AA/Stable

IND AA/Stable

Certificate of deposits

Long-term

INR150

IND A1+

IND A1+

-

-

ANNEXURE

Issue Name/ Type

ISIN

Date of Allotment

Tenor (years)

Maturity Date

Amount mobilised (billion)

Coupon rate

Put/Call option

Rating/Outlook

(% p.a.)

Basel III-complaint Tier II bonds

INE667A08096

3 May 2017

10

3 May 2027

INR5

8

Nil

IND AA/Negative

Total utilised

INR5

Total unutilised

INR11

Basel III AT1 perpetual bonds

INE667A08088

24 October 2016

Perpetual

Perpetual

INR10

9.95

Nil

IND A+/Negative

Basel III AT1 perpetual bonds

INE667A08062

30 March 2016

Perpetual

Perpetual

INR3.7

11.25

Nil

IND A+/Negative

Basel III AT1 perpetual bonds

INE667A08054

30 March 2016

Perpetual

Perpetual

INR5

11.25

Nil

IND A+/Negative

Basel III AT1 perpetual bonds

INE667A08070

15 July 2016

Perpetual

Perpetual

INR9.3

11.25

Nil

IND A+/Negative

Basel III AT1 perpetual bonds

INE667A08104

25 July 2017

Perpetual

Perpetual

  INR4.5

9.80

Nil

IND A+/Negative

Total utilised

INR32.5

Total unutilised

INR5.5


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.

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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. 

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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