By Jindal Haria

India Ratings and Research (Ind-Ra) has rated Indian Bank’s additional certificate of deposits as below:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating

Rating Action

Certificate of deposits

-

-

1-365 days

INR35

IND A1+

Assigned

The ratings reflects Indian Bank’s improved standalone performance in terms of consistent internal accruals, better asset quality metrics than peers’, and adequate capitalisation to grow its franchise in an environment where most of the public sector banks (PSBs) are in capital conservation mode. The bank has consistently maintained above-average capital ratios and has a better liquidity profile compared with most PSBs. It continues to perform better than most peers’, reporting a return on assets of 53bp in FY18 in the face of accelerated gross non-performing asset (NPA) recognition in 4QFY18. As a result of this, almost all other PSBs reported losses. Ind-Ra expects the bank to maintain its share in the system’s advances and deposits. The ratings also reflect the government of India’s (GoI) high shareholding (3QFYE19: 81.7%) in Indian Bank and extraordinary support from the GoI under severe stress if at all.
 

KEY RATING DRIVERS

Stabilising Corporate Asset Quality; Non-Corporate Assets Could Increase Slippages: The bank’s gross NPAs inched up to 7.66% in 9MFY19 (FY18: 7.37%, 3QFY18: 6.27%). This movement has been wider for most other banks. In the agency’s opinion, this was mainly attributed to the bank’s lower exposure to those corporate assets where the regulator felt the need to accelerate stress recognition in 4QFY18. Corporate NPAs constitute about 75% of the bank’s GNPA. Ind-Ra expects incremental slippages from corporate segment to lower substantially; however, the bank to could witness credit costs of about 1.5% of net advances in FY19 mainly on account of aging of corporate stressed assets. The bank’s provision on National Company Law Tribunal assets is at par with peers. The bank’s special mention account 1 and special mention account 2 (mostly consisting of accounts less than INR100 million of the exposure) are about 8% of the bank’s net advances; Ind-Ra expects some slippages over FY19-FY20.

Strong Capitalisation:
Indian Bank remains the most capitalised PSB with a common equity tier 1 (CET1) ratio of 10.9% in 3QFY19 (FY18: 11%, FY17: 11.82%). The CET levels are among the highest in the banking universe despite any capital infusion from the GoI during FY16-FY18. The bank is self-sufficient in maintaining minimum CET1 buffer over the Basel III transition period. In addition, it has relatively strong access to capital markets, if required. Ind-Ra expects the internal accruals to remain stable, as well as derives comfort from Indian Bank’s comfortable capital buffers and relatively higher pre-provision operating buffers, both of which provide the bank with the ability to grow its franchise and adequate capability to withstand credit costs that could emanate from existing stock of stressed assets.

Comfortable Liquidity:
Its liquidity profile is better than most banks. Until FY17, the bank usually ran a small surplus in the short-term financing gap; it witnessed a minor deterioration as the gap turned negative in FY18. There could be some pressure on the liquidity profile of the bank if the asset growth is not mirrored in the deposit growth and the bank may need to resort to short-term borrowings. The bank’s CASA of about 36% at 3QFY19 is the highest amongst banks based in the southern part of India.


RATING SENSITIVITIES

Positive: A meaningful improvement in the bank’s profitability, and the diversification and significant growth of its franchise leading to an increase in its systemic importance while maintaining its competitiveness will lead to a positive rating action.

Negative:
A negative rating action, although unlikely in the near term, could result from a significant erosion of the capital buffers due to a consistent decline in the asset quality, especially from a substantial increase in NPAs from restructured assets.


COMPANY PROFILE

India Bank is a medium-sized PSB with a high presence in the southern part of the country. At end-September 2018, the bank had 2,839 branches and 3,787 ATMs.

FINANCIAL SUMMARY

 

Particular

FY18

FY17

Total Assets (INR billion)

2,527.16

2,182.3

Total Equity (INR billion)

184.48

171.6

Net Profit (INR billion)

12.59

14.1

Return on Assets (%)

0.53

0.67

CET1 (%)

11

11.82

Capital adequacy ratio (%)

12.55

13.64

Source: Company annual report


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (INR billion)

Rating

22 January 2019

30 October 2017

1 August 2016

Issuer rating

Long-term/Short-term

-

IND AA+/Stable/IND A1+

IND AA+/Stable/A1+

IND AA+/Stable/IND A1+

IND AA+/Stable/IND A1+

Certificate of deposits

Short-term

INR120

IND A1+

IND A1+

IND A1+

IND A1+


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

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. 

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. 

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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