By Jindal Haria

India Ratings and Research (Ind-Ra) has affirmed IDBI Bank Ltd’s (IDBI) Long-Term Issuer Rating at ‘IND A’ and Short-Term Issuer Rating at ‘IND A1’ while resolving the Rating Watch Negative. The Outlook is Negative. 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

Upper Tier II subordinated bond programme#

-

-

-

INR3.5

WD

Withdrawn (paid in full)

Basel III compliant bonds*

-

-

-

INR20

IND A/Negative

Affirmed; Off RWN; Outlook Negative

Omni infrastructure bonds#

-

-

-

INR80

IND A/Negative

Affirmed; Off RWN; Outlook Negative

Basel III-complaint Tier II bonds#

-

-

-

INR30

IND A/Negative

Affirmed; Off RWN; Outlook Negative

Deposit rating

 

 

 

-

IND tA/Negative

Affirmed; Off RWN; Outlook Negative

Senior debt#

-

-

-

INR36.31(reduced from INR52.22)

IND A/Negative

Affirmed; Off RWN; Outlook Negative

Lower Tier II bonds#

-

-

-

INR37.3

IND A/Negative

Affirmed; Off RWN; Outlook Negative

 

Certificates of deposits

-

-

7-365 days

INR160

IND A1

Affirmed;

 

 *Yet to be issued 

# Details are given in annexure

 

Analytical Approach: To arrive at the ratings, Ind-Ra continues to factor in sustained capital support provided to IDBI from both government of India (GoI) and Life Insurance Corporation of India (LIC) in view of them being the majority shareholders of the bank.


The RWN resolution reflects the substantial infusion of equity into the bank by the LIC. The affirmation reflects the reinstated capital levels, initial stages of synergy with LIC’s network and the fact that the bank maintained its non-bulk deposits in FY19 in spite of the change in ownership.

 

The Negative Outlook reflects the agency’s expectation that the bank is likely to require sizeable equity infusion over FY20-FY21, and while LIC has articulated its commitment to the same, the quantum and timing is not known at present. The Outlook also reflects the continued pressure on the bank’s franchise and its inability to materially grow its asset book, which could result in its operating buffers facing recovery challenges. In addition, the Negative Outlook factors in Ind-Ra’s expectation that IDBI would continue to grapple under the Reserve Bank of India’s prompt corrective action framework (which would continue to weigh on its share of systemic assets and liabilities) and credit costs over corporate accounts in spite of a high coverage ratio, as its GNPAs are among the highest in its peer group(27.47% at end-FY19).

 

There has been a weakening in IDBI’s standalone franchise, a continued fall in its share of systemic assets and liabilities, and a sharp deterioration in its asset quality. These three factors are likely to persist at least until the resolution of asset quality issues and the stabilisation of capital buffers. These concerns could ease out over medium term if the expected strategy with LIC plays out and the franchise starts gaining market share.

 

KEY RATING DRIVERS

Likely Change in Ownership: LIC became the majority stake-holder of IDBI (51% shareholding) by infusing almost INR216.24 billion into the bank in FY19. The GoI now holds 46.6% stake in the bank, while the balance is held by retail and other categories of shareholders. The bank requires a minimum additional equity of INR70 billion-80 billion of equity, which would need to be jointly contributed by the LIC and GoI (as LIC cannot exceed 51% holding), most of it in FY20. Ind-Ra expects both to provide the bank with required equity in line with their shareholdings. LIC will reduce its share in the bank within a certain timeframe (which is not publicly known at this point) to comply with the Insurance Regulatory and Development Authority’s guidelines and specific approvals related to this acquisition.

 

Despite High Provision Coverage, Credit Cost Overhang Continues: IDBI’s operating metrics deteriorated sharply in FY18-FY19 as the strength of its earning profile was impacted by the pressure on its asset quality. Ind-Ra expects IDBI’s credit costs to decline (provisions on GNPAs to average net advances - FY19: 14.1%; FY18: 10.7%; FY17: 6.1%) to about 7-10% (mainly on account of aging and fresh slippages that have declined significantly) over FY20 and FY21 together, depending on the pace of resolutions of the cases under NCLT. These costs are still substantially higher than its historic steady state pre-provision operating profits of 2.5%, implying that the bank will continue to make net losses over FY20-FY21 and equity will continue to be eroded.

 

IDBI’s provisions on assets under the National Company Law Tribunal (List 1 and List 2) are almost at par with most PSBs at about 85%. Ind-Ra expects material write-backs in FY20 from a few accounts that are in advanced stages of resolution; this could reduce the expected net credit costs.  If the bank is unable to grow its asset book, its net interest and other income streams may remain steady on an absolute basis while the operating cost would continue to increase; this could actually lead to a decrease in its operating buffers.

 

Asset Quality Overhang to Persist: IDBI’s stressed advances/total advances ratio was about 30.2% at end-FY19 (over 32% at end-September 2018). This excludes its non-funded lines towards the operational NPAs and investments (converted equity, security receipts etc. of about INR36 billion), which could also need to be marked down in the near-to-medium term. IDBI’s higher exposure to stressed sectors (such as infrastructure), along with sizeable concentration in the past towards highly levered corporate groups, mainly on account of inadequately strict sectoral and other filters, have made it more vulnerable to asset quality challenges than the public sector banks. The net NPAs of the bank have declined to 10.11% in FY19 from 16.69% in FY18, while the GNPAs have largely remained stable at 27.47%. Although the provision coverage of the bank is higher than that of many PSBs (including technical write-offs - 83% in FY19; 63.4% in FY18), the asset quality and credit cost overhang will persist in the medium term on account of the sheer quantum of gross NPAs and net NPAs.

 

Its special mention (1 and 2) accounts declined significantly to INR73.4 billion in FY19 from INR210.6 billion in FY18. The bank is also in the process of streamlining its appraisal and sanctioning processes for corporate assets, has set up parameterised assessment process for non-corporate loan products, and is attempting to centralise sanctioning powers. If and when the capital concerns abate, the lending machinery (both corporate and non-corporate) is kick-started, and expected synergies with LIC play out (the bank will get access to LIC’s network and cross sell opportunities), Ind-Ra expects originations of better quality

 

Also, IDBI’s legacy concentrations will remain an overhang in the near term, given the regulator’s circular on the resolution of stresses assets and the sluggish pace of economic recovery. Higher-than-expected deterioration in the bank’s profitability in the short term, along with its inability to shore up adequate capital, could further strain the standalone profile and attract a further negative rating action. 

 

Additional Capital Required in spite of Change in Ownership and Huge Capital Infusion: IDBI’s common equity tier 1 ratio deteriorated to the lowest among all SCBs in 1HFY19 (3.8% compared with 7.42% at FYE18). Post the infusion by LIC, it rebounded to 8.91% in FY19. Ind-Ra expects at least 3-4% erosion over two years implying equity requirement of at least INR70-80 billion. CET buffers are key monitorables and decline close to regulatory levels could be key rating driver.

 

Modest Liquidity: As a percentage of assets, IDBI’s cumulative one-year funding gap (excess of short-term liabilities over short-term assets) deteriorated to about 13% in 9MFY19 against a gap of 16.7% in FY18. Overall, this is better than the funding gap for weak PSBs; however, once the bank restarts lending in the medium term, Ind-Ra expects this gap to widen if it is not supported by shorter tenor assets. The proportion of bulk funding is also on higher side, but it declined to 25.3% in FY19 from 32.5% in FY18. The bank’s liquidity coverage ratio was 114.37% in FY19, higher than the current regulatory requirement of 100%. 

 


RATING SENSITIVITIES

If the bank does not receive adequate and timely equity infusion to maintain the minimum regulatory capital in Ind-Ra’s opinion or if the short term asset funding gaps increase materially, it could result in a negative rating action. The bank’s inability to show material progress on harnessing the LIC network for its assets and deposits sales strategy could also result in a negative rating action.
 


COMPANY PROFILE

IDBI is a public sector bank in India with pan-India presence. The bank had 1,892 branches and 3,701 ATMs across India at end-FY19.

FINANCIAL SUMMARY

Particulars

FY19

FY18

Total assets (INR billion)

3,202.84

3,503.136

Total equity (INR million)

376.11

212.097

Net profit (INR million)

-151.16

-82.379

Return on assets (%)

-4.5

-2.46

Common equity tier 1 ratio (%)

8.91

7.42

Capital adequacy ratio (%)

11.58

10.41

Net interest income

59.06

56.40

Source: Bank Data

 

 


RATING HISTORY

Instrument Type

Current Rating/ Outlook

Historical Rating/Outlook/Rating Watch

Rating Type

Rated Limits (billion)

Rating

30 November 2018

5 June2018

26 July 2017

17 May 2017

16 January 2017

Issuer rating

Long-/short-term

-

IND A/Negative/IND A1

IND A/RWN/IND A1

IND AA-/Negative/IND A1+

IND AA/Negative/IND A1+

IND AA/Negative/IND A1+

IND AA+/Stable/IND A1+

Upper Tier II subordinated bond program

Long-term

INR3.5

WD

IND BBB-/RWN

IND BBB-/Negative

IND BBB+/Negative

IND A-/Negative

IND A+/Negative

Basel III compliant bonds

Long-term

INR20

IND A/ Negative

IND A/RWN

IND AA-/Negative

IND AA/Negative

IND AA/Negative

IND AA+/Stable

Omni infrastructure bonds

Long-term

INR80

IND A / Negative

IND A/RWN

IND AA-/Negative

IND AA/Negative

IND AA/Negative

IND AA+/Stable

Basel III-complaint Tier II bonds

Long-term

INR30

IND A / Negative

IND A/RWN

IND AA-/Negative

IND AA/Negative

IND AA/Negative

IND AA+/Stable

Deposit rating

Long-term

-

IND tA / Negative

IND tA/RWN

IND tAA-/Negative

IND tAA+/Negative

IND tAA+/Negative

IND tAAA/Stable

Senior debt

Long-term

INR36.31

IND A / Negative

IND A/RWN

IND AA-/Negative

IND AA/Negative

IND AA/Negative

IND AA+/Stable

Lower Tier II bonds

Long-term

INR37.3

IND A / Negative

IND A/RWN

IND AA-/Negative

IND AA/Negative

IND AA/Negative

IND AA+/Stable

Certificates of deposits

Short-term

INR160

IND A1

IND A1

IND A1+

IND A1+

IND A1+

IND A1+

ANNEXURE

Instrument Type

ISIN

Date of Allotment

Tenor (years)

Maturity Date

Issue size (billion)

Amount outstanding (billion)

Coupon rate (%)

Put/Call option

Rating/Rating Watch

Rating Action

Senior Debt

Omni 2003 G

INE008A08UA8

12 January 2004

15

12 January 2019

INR0.25

INR0.25

7

12-Jan-2016

WD

Withdrawn (paid in full)

FLEXI-19 RIB E

INE008A09885

12 January 2004

15

12 January 2019

INR1.07

INR1.07

7

12-Jan-2016

WD

Withdrawn (paid in full)

FLEXI-21 RIB D

INE008A09AM3

20 April 2004

15

20 April 2019

INR0.19

INR0.19

6.75

20-Apr-2016

WD

Withdrawn (paid in full)

IDBI Omni Bonds 2007 Sr.VII

INE008A08N67

23 September 2007

15

23 September 2022

INR0.04

INR0.04

10.07

-

IND A/Negative

Affirmed; Off RWN; Outlook Negative

IDBI Omni Bonds 2008 Sr.XV RRB II

INE008A08Q72

15 December 2008

10

15 December 2018

INR14.40

INR14.40

11.3

-

WD

Withdrawn (paid in full)

IDBI Omni Bonds 2008-09 Sr.XVII

INE008A08Q98

14 March 2009

20

14 March 2029

INR0.02

INR0.02

11.25

-

IND A/Negative

Affirmed; Off RWN; Outlook Negative

IDBI Omni Bonds 2009-10 Sr.IV

INE008A08R71

26 September 2009

20

26 September 2029

INR0.02

INR0.02

9.67

-

IND A/Negative

Affirmed; Off RWN; Outlook Negative

Total unutilised

36.23

 

Total

36.31

 

 

Omni Infrastructure Bonds

Omni 2014-2015 Infrastructure Bond Series I

INE008A08U76

12 September 2014

10

12 September 2024

INR10.00

INR10.00

9.27

-

IND A/Negative

Affirmed; Off RWN; Outlook Negative

Omni 2014-2015 Infrastructure Bond Series III

INE008A08U92

21 January 2015

10

21 January 2025

INR30.00

INR30.00

8.725

-

IND A/Negative

Affirmed; Off RWN; Outlook Negative

Omni Infrastructure Bond 2015-2016 Series III

INE008A08V26

09 February 2016

10

09 February 2026

INR10.00

INR10.00

8.8

-

IND A/Negative

Affirmed; Off RWN; Outlook Negative

Total unutilised

INR30

 

Total

INR80

 

 

Lower Tier II bonds

IDBI Omni Bonds 2009-10 Tier II Sr.VII

INE008A08S13

23 November 2009

10

23 November 2019

INR3.03

INR3.03

8.53

-

IND A/Negative

Affirmed; Off RWN; Outlook Negative

IDBI Omni Bonds 2009-10 Tier II Sr.XII

INE008A08S62

23 March 2010

10

23 March 2020

INR6.00

INR6.00

9.05

-

IND A/Negative

Affirmed; Off RWN; Outlook Negative

Total unutilised

INR28.27

 

Total

INR37.30

 

 

Upper Tier II Subordinated Bond Program

IDBI Omni Bonds 2008-09 Upper Tier II Sr.XIX

INE008A08R14

31 March 2009

15

31 March 2024

INR3.50

INR3.50

9.5

Call - 31 March 2019

WD

Withdrawn (paid in full)

Total unutilised

-

 

Total

INR3.5

 

 

Basel III-complaint Tier II bonds

Omni Tier 2  2015-2016 Series I

INE008A08V00

31 December 2015

15

31 December 2030

INR10.00

INR10.00

8.62

Call – 31 December 2025

IND A/Negative

Affirmed; Off RWN; Outlook Negative

Omni Tier 2  2015-2016 Series II

INE008A08V18

02 January 2016

10

02 January 2026

INR9.00

INR9.00

8.62

None

IND A/Negative

Affirmed; Off RWN; Outlook Negative

Total unutilised

INR11

 

Total

INR30

 


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

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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

    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