By Jindal Haria

India Ratings and Research (Ind-Ra) has rated Canara Bank’s (Canara’s) certificates of deposits (CDs) as follows: 

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating

Rating Action

CDs

 

 

7-365 days

INR300

IND A1+

Assigned

 

Analytical Approach: The rating reflects Canara’s systemically important position and Ind-Ra’s expectations that the bank would continue to receive support from the government of India (GoI).
 

KEY RATING DRIVERS

Growth in Systemic Importance, but GoI Support Would be Required in FY20: Canara is the fourth-largest public sector bank and seventh-largest bank on an overall basis in the country in terms of its assets. The bank’s share in systemic advances grew to 4.8% in FY19 from 4.6% in FY16, and it also broadly maintained its share in deposits (around 5.2%) over this period. Meanwhile, the shares of larger banks such as Punjab National Bank (‘IND AA+’/Negative) and Bank of India (‘IND AA+’/Negative) declined in both deposits and advances. Canara had received a capital infusion of INR48.6 billion from the GoI in FY18, but it did not witness any equity infusion in FY19, as banks whose Core Equity Tier 1 (CET1) buffers were closer to or lower than regulatory requirements were accorded priority during the year.

Given the stress in the system induced by tight liquidity, slow credit and lower-than-expected pace of resolutions of especially the large cases under the National Company Law Tribunal (NCLT), Canara’s credit costs (along with those of some other public sector banks (PSBs) could be at the higher end of the range that was indicated in Ind-Ra’s outlook on the banking sector (about 4.4% over two years beginning 2HFY19). Ind-Ra believes the bank would require capital from the GoI to achieve its modest growth ambitions and cover the likely credit costs resulting from aging in the absence of speedy resolutions while keeping the CET levels materially above regulatory requirements. The expected infusion from the GoI would be a key monitorable over 1HFY20; in its absence, growth in bank’s systemic importance could be impacted, according to the agency.

Improvement in Liquidity and Deposit Profile:  With the seasoning of the branches that had been set up during FY13-FY15 (52% growth in branches over this period), the bank’s low cost current account and savings account deposits increased to about 30% in FY19 from 24% in FY15. In addition, the retail term deposits increased to 39% from 36% during FY15-FY19. The bank’s asset liability maturity statements indicate a short-term asset funding surplus (excess of short-term assets over short-term liabilities) of about 3.5% in FY19 against a funding gap of about 12% in FY18. Ind-Ra expects the deposit profile of the bank to continue to improve with further seasoning of its branches.

Profitability Continues to be a Challenge:  The bank witnessed minor profits (INR3.4 billion) in FY19, mainly on account of tax write-backs. Canara incurred credit costs of INR127.2 billion in FY19 and INR148.8 billion in FY18 (credit costs to average advances of 3.1% and 4.1%, respectively), largely due to provisions on NPAs of about INR276 billion. Ind-Ra expects the bank’s credit costs to reduce to about 2% in FY20 and FY21 each, assuming that the two corporate assets under NCLT that are in advanced stages of resolution would go through. The agency estimates the bank may see limited profitability in FY20 and FY21, unless the resolutions of large assets under NCLT speed up and result in write-backs. The bank’s operating buffers (pre-provisioning profits to average advances of about 2.4%) could be substantially consumed by credit costs over FY20-FY21, leaving little room for accruals. In case Ind-As is implemented, it could result in additional credit costs if the pooling of loans is not done in a logical and appropriate manner.  The bank’s provision coverage (excluding technical write-offs) remained at about 41.5% in FY19 (reported provision coverage increased to 68% in FY19 from 58% in FY18) and is among the lowest in its peer-set; a part of the credit cost estimates for Canara could be incurred on account of the company’s efforts to catch up with its peers in terms of provision coverage. A part of the expected credit costs have been mitigated by slowdown in slippages and the fact that the GNPAs of the bank are lower than those of most peers, implying lower impact of aging (excluding provision catch-up).

Capitalisation Remains Weaker than Peers: The capital infusion received from the GoI in FY18 was absorbed to fund the losses, and hence, Canara’s capitalisation remained modest. At end-March 2019, Canara’s CET1 capital was 8.31%, lower than all similar-sized banks. In 4QFY19, the bank’s risk weighted assets declined by about INR300 billion, while its advances grew by 2%; this lent support to its CET1, which would otherwise have fallen below 8%. Ind-Ra’s aforementioned credit cost estimates at growth rates of 10% annually with low accruals would result in equity requirement of at least INR35 billion and an equivalent amount of additional tier 1 capital over FY20 and FY21. The bank also holds a 30% stake in Can Fin Homes, which is valued at INR14 billion at prevailing market prices. The capitalisation ratios would be a key monitorable, especially in 1HFY20.


RATING SENSITIVITIES

Negative: Although unlikely, a significant deterioration in the bank’s liquidity position along with impaired ability to refinance its liabilities in a timely manner could result in a rating downgrade.


COMPANY PROFILE

Canara has a pan-India presence, with the third-largest network of 6,315 domestic branches in FY19. 60% of its branches are based in rural and semi-urban areas, supporting the GoI’s initiative of banking for all.

 

FINANCIAL SUMMARY

 

Canara Bank-Standalone (Particulars)

FY19

FY18

Total assets (INR billion)

6,947.67

6,168.90

Total equity (INR billion)

361.77

356.05

Net income (INR billion)

3.47

-42.2

Return on assets (%)

0.06

-0.75

CET1 (%)

8.31

9.51

Capital adequacy ratio (%)

11.9

13.22

Source: Company annual report, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

26 October 2018

3 August 2017

26 October 2016

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

Certificate of Deposits

Short-term

INR300

IND A1+

 -

 -

 -

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 2 instrument

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

INE476A09264

INR15

31 December 2015

INR15

Annual

8.4

31 December2025

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 TIER II Bonds 2016-17

INE476A08050

INR30

27 April 2016

INR30

Annual

8.4

27 April 2026

27 April 2026

 

Utilised
limit

INR 54

 

 

 

 

 

 

Basel III AT1 bonds

BASEL III COMPLIANT ADDITIONAL TIER I

INE476A08068

INR10

13 December 2016

INR10

Annual

8.6

Perpetual Bond - Call Option-

Perpetual

13 December 2021

BASEL III COMPLIANT ADDITIONAL TIER 1

INE476A08035

INR15

5 March 2015

INR15

Annual

9.55

Perpetual Bond - Call Option-

Perpetual

5 March 2025

 

Utilised
limit

INR 25

 

 

 

 

 

Unutilised
limit

INR 15

 

 

 

 

 

Total

INR 40

 

 

 

 


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.

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. 

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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