By Jindal Haria

India Ratings and Research (Ind-Ra) has rated IndusInd Bank Limited’s (IBL) additional Tier I issuance as follows:
 

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

AT1 perpetual debt*

-

-

-

INR20

IND AA/Stable

Assigned

* Yet to be issued

 

The rating reflects IBL’s consistent and strong profitability, diversified income profile, leadership positions in some asset classes, and higher core capital level than those of peers, which enable the bank to absorb credit costs under Ind-Ra’s stress tests. In terms of the funding side, IBL has shown a continuous improvement in its funding profile; however, the bank’s depositor concentration remains higher than those of larger private banks, although it has been on a downtrend.

KEY RATING DRIVERS

Robust Pre-Provision Operating Profit Generation; May Get Asset Mix Boost: IBL’s pre-provision profitability (9MFY19: 4.8% annualised; FY18: 5.2%; FY17: 5.4%) remained higher than those of peers, primarily driven by its consumer finance portfolio and relationship approach to the corporate loan portfolio. Its exposure to a large infrastructure and financial conglomerate has recently witnessed significant credit deterioration; the bank had already made a provision for 30% of the debt extended to the conglomerate by 3QFYE19.

 

IBL has a stable and a higher non-interest income as a percentage of gross income of 35%-40% than 25%-40% of peers. The bank’s non-interest income is driven by its foreign exchange, distribution and investment banking businesses, among others. In addition, its merger with Bharat Financial Inclusion Limited (BFIL) is likely to be return on asset-accretive. The merger will release cash on the balance sheet of BFIL, lower IBL’s capital requirement on BFIL’s assets, increase its ability to lever and provide it access to about 7 million new customers and aid in the priority sector target achievement.

 

Concentration in Liability Profile Declining but Still High: IBL’s top 20 depositor concentration declined to 24% in FY18 from 32% of the total deposits in FY16, though was higher than those of the ‘IND AA+’ peer group.

 

Although there was a significant churn in IBL’s top 50 depositors in the last three quarters, the churn provides the bank an opportunity to increase the pool of entities where it can mobilise deposits.

 

On the positive side, the increase in IBL’s branches to 1,558 in 3QFY19 from 804 in FY15 and the bank’s focus on digital channels are likely to increase the granularisation and lower deposit concentration of its liability profile, the benefit of which the bank would continue to accrue over the next one-two years as most newly added branches get seasoned.

 

CASA Accretion Continues: IBL has been consistently increasing its low-cost current account savings account (CASA) base (CASA ratio – 3QFY19: 43.6%; FY18: 44.0%; FY17: 36.9%; FY16: 35.2%). Over FY13-FY18, the CASA ratio of IBL rose at a CAGR of 33.3%, outpacing the overall deposit growth of 22.9%. IBL’s funding profile is continuously improving; its short-term liabilities exceeded short-term assets by 5.3% of the total assets at 3QFYE19 and were well within the regulatory limits.

 

Any slowdown in the accretion of CASA deposits will be a key monitorable. Ind-Ra expects the competition for deposits to increase in FY20, given the system’s deposit growth has been lagging advances growth. Furthermore, there has been a pick-up in credit growth and a rise in lending by public sector banks. Five such banks have recently exited the Reserve Bank of India’s prompt corrective action framework and could look at growing their balance sheets. Ind-Ra expects the fast-growing banks’ reliance on borrowings and bulk deposits to increase to fund their asset growth.

 

Asset Quality Stable: Over the last five years, IBL’s gross non-performing asset ratio of 1.0%-1.2% was relatively better than the 4%-10% level of larger peers. In addition, the bank’s credit costs were better at about 60bp over FY15-FY18 (9MFY19: 41bp) when most other banks saw elevated credit costs. However, its recent exposure to the large infrastructure and financial conglomerate will result in higher credit costs in FY19 and FY20.

 

IBL’s lending to segments, including real estate (4% of advances in 3QFY19) loan against property (5%) and small and medium enterprise (32%), could see incremental stress as, Ind-Ra believes, that these asset classes are witnessing higher delinquencies. Material asset quality deterioration in the above segments could result in pressure on the high capital buffers of IBL. In Ind-Ra’s opinion, the track record of the bank in terms of originating and managing asset quality could mitigate the aforementioned risks.

 

Merger with BFIL Underway; Multiple Synergies to Drive Microfinance Business Performance: The merger of IBL with BFIL would give the bank access to a large customer base and, thus, opportunity to cross-sell, both on the liability and asset sides; lower the cost of capital for BFIL; monetise priority sector lending certificates; and release capital. As of now, only National Company Law Appellate Tribunal’s approval is pending.

 

Following the merger, the microfinance business will constitute about 10% of advances. Further growth thereafter in the business is likely be in line with the overall balance sheet growth. Ind-Ra’s stress tests indicate that the bank’s profitability and capital buffers would be adequate to withstand event-led risks in the sector.

 

Preferential Issue to Promoters and Release of Capital from BFIL to Add to Capital Buffers: Along with the release of capital from the BFIL merger, IBL is also resorting to a preferential issue to the promoters. Ind-Ra estimates that the preferential allotment will add about 130bp to IBL’s common equity tier I and capital adequacy ratios, which were 12.79% and 14.19% in 3QFY19, respectively. With strong capital buffers, Ind-Ra believes that IBL is well placed to continue its advances growth at a significantly higher level than the system’s loan growth.


RATING SENSITIVITIES

Positive: A substantial increase in the franchise and scale, along with a considerable improvement in the liability profile and an even more granular funding mix, while sustaining the capital and operating buffers, could lead to a positive rating action.  

 

Negative: A significantly higher-than-expected deterioration in 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 rating action.


COMPANY PROFILE

IBL is a new-generation private bank that commenced operations in 1994. The bank is a significant player in financing commercial and other vehicles. In addition, it provides corporate working capital loans.

 

In December 2018, IBL’s balance sheet size was INR2.56 trillion. The bank’s net profit was INR29.4 billion in 9MFY19 (9MFY18: INR26.5 billion). In 3QFY19, the bank had 1,558 branches and 2,453 ATMs across the country.

 

FINANCIAL SUMMARY

 

Particulars

FY18

FY17

Total assets (INR billion)

2,216.26

1,786.48

Total equity (INR billion)

238.42

206.46

Net profit (INR billion)

36.06

28.68

Return on assets (%)

1.90

1.86

Common equity tier 1 (%)

13.42

14.02

Capital adequacy ratio (%)

15.03

15.31

Source: IBL, Ind-Ra

 


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

29 March 2018

31 March 2017

23 March 2015

Issuer rating

Long-/short-term

-

IND AA+/Stable/IND A1+

IND AA+/Stable/IND A1+

IND AA+/Stable/IND A1+

IND AA+/Stable/IND A1+

Senior unsecured redeemable bonds*

Long-term

INR20

IND AA+/Stable

IND AA+/Stable

IND AA+/Stable

IND AA+/Stable

AT1 perpetual debt*

Long-term

INR40

IND AA/Stable

IND AA/Stable

IND AA/Stable

-

 

* Details in annexure


ANNEXURE

Senior Unsecured Redeemable Bonds

 

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

 

AT1 Perpetual Debt

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

Unutilised

INR20.0

IND AA/Stable

 

Total

 

 

 

INR40.0


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instrument, 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