By Jindal Haria

This announcement rectifies the version published on 4 April 2020 to correctly state the credit cost, return on assets and liquidity coverage ratio figures. The amended version is as follows:

 India Ratings and Research (Ind-Ra) has revised IndusInd Bank Ltd’s (IBL) Outlook to Negative from Stable while affirming the Long-Term Issuer Rating at ‘IND AA+’. The agency has also affirmed the Short-Term Issuer Rating at ‘IND A1+’. The instrument-wise rating actions are given below: 

Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

*Senior unsecured redeemable bonds

-

-

-

INR20

IND AA+/Negative

Affirmed; Outlook revised to Negative from Stable

*Additional Tier 1 (AT1) Bonds

-

-

-

INR40

IND AA/Negative

Affirmed; Outlook revised to Negative from Stable


*Details in annexure

The Outlook revision factors in the possible greater challenges for IBL than that for its peers regarding its deposit base, because of its above-average dependence on institutional deposits and funding. This could lead to the bank accessing other avenues of funding such as  borrowings and capital market instruments amid the challenging operating environment (COVID-19 led lockdown). The Negative Outlook also factors in the agency’s opinion that the bank could witness higher asset quality pressures than in the past in view of its asset mixdue to the current lockdown. While IBL has strong profitability and adequate capital buffers, the challenges faced on the valuation side can hinder its ability to raise further capital as and when required.

The rating affirmation reflects IBL’s granular loan portfolio, diversified income profile, strong operating buffers, strong management team, leadership position in some asset classes, and higher than peers’ core capital levels, which together provide the bank with the ability to absorb credit costs under Ind-Ra’s stress tests.

KEY RATING DRIVERS

Modest Deposit Profile; Challenges Aggravated by Operating Environment: IBL’s top 20 depositor concentration, though declined, remains elevated (FY19: 24.31%) and is higher than most peer banks’. While the deposit outflows of 11% in 4QFY20 (almost 50% of that i.e. INR 90 billion because of a state government’s directive to its entities to withdraw deposits held in private banks) have been partly replenished, the bank’s deposit concentration could increase its reliance on non-deposit liabilities. Also, the prevailing operating challenges could constrain its ability to build incremental deposits quickly (if required). However, the bank has the ability to tap other avenues for liabilities with varying costs and tenors and it also carried excess SLR of USD 1 billion at end-March 2020. While the bank has a pool of corporate depositors that have often remained steady or moved in and out of the top 50 depositor list of the bank, significant deposit outflow would be a key negative rating sensitivity. 

IBL’s proportion of bulk deposits in the total deposits also continues to be higher than its peers’. The bank’s current and savings account deposits remained more or less steady at 42.4% at end-December 2019 (FY19: 43.1%); while the current account declined by almost 2.5%, it has been partially compensated by an increase in savings accounts deposits by 2% points. 

Credit Cost could Remain Elevated: IIB’s credit costs in FY19 were higher at 1.2% than its long-term average of about 60bp, mainly on account of about INR18 billion of credit costs on a large exposure (INR30 billion) to an infrastructure and financing conglomerate. Over 9MFY20, the bank has recognised a housing finance exposure as fraud and will recognise the entire exposure as credit cost over the next three quarters (but, adjusted in the net worth). Additionally, the bank has an exposure to one large stressed telecom account, where the management believes a large part of non-fund limits may fall off in view of the underlying performance. The bank also has exposure to some of the stressed groups in the entertainment and diversified sectors that are standard and have been disclosed by the bank. It would also continue to see credit costs on the aging of existing stressed assets and plans to increase the provision cover to 60% from 53%; hence, the agency opines that the credit cost for the bank could remain elevated in the near term. 

IBL’s gross non-performing assets have increased to 2.18% as against the long-term average of 1%-1.2%. Ind-Ra expects that the bank could need to provide 1%-1.2% over the next two years over the average run rate of 0.6% While its exposure to special mention (1 & 2) accounts was 1.17% in 9MFY20 (0.66% of total advances in FY19), it is lower than most peer rated banks’. The bank has also reported insignificant non-performing assets in both gems & jewellery and real estate developer segments. The asset quality of its vehicle finance portfolio (26% of advances) and other non-corporate segments has remained steady, but this segment along with microfinance (10% of advances; full cash collection), gems and jewellery (5%), loan against property (5%) and construction finance (3.6%) are likely to bear the brunt of the effects of the lockdown. Given the moratorium could be extended to these segments by the bank, the reporting impact could be limited in the next two quarters; but, the agency’s view is that the full impact could be felt subsequently. 

Robust Pre-Provision Operating Profit (PPOP) Provides Buffers Against Capital Erosion: IBL’s PPoP has remained higher than peers’ (9MFY20: 5.4% annualised; FY19: 4.9%, FY18: 5.2%), primarily driven by its consumer finance portfolio and high-yielding microfinance portfolio. The bank has a stable and higher than peers non-interest income as a percentage of gross income (35%-40% compared with 25%-40% for peer and better rated banks), driven by its foreign exchange, processing fees, distribution and investment banking businesses. The agency expects downward pressure on fees from corporate accounts (15% of fee income is from investment banking activities). Credit costs of 1.6% in FY19 (earlier around 0.6%) resulted in a decline in return on assets to 1.4% in FY19 from 1.9% in FY18. In 9MFY20, the credit costs are around 0.8% annualised, while return on assets is 1.9% on the back of higher PPOP. 

Adequate Capitalisation: The core equity tier 1 of the bank including profits was 13.58% at end-9MFY20. Ind-Ra expects that in business as usual scenario, this along with internal accruals would provide the bank with adequate growth capital for a couple of years in a normal business scenario. An improvement in the price to book of the bank’s shares could also enhance its current ability to raise equity if and when required. The bank’s capital to risk (weighted) assets ratio was 15.43% at end-9MFY20 and is comparable to larger banks. 

Liquidity Indicator – Adequate: The bank’s short-term asset funding gap (excess of short-term liabilities over short-term assets) was in surplus of about 2% of the total assets in December 2019 (December 2018: 4%) and is comparable to other large and mid-private sector banks’. However, the bank has a concentrated deposit profile, and the substantial withdrawal of large deposits could impact its asset-liability profile materially. While the bank has not witnessed material deposit withdrawal other than from state entities of a particular state, the concentration puts the bank at a risk that it would manage through other forms of liability that it has access to and often at competitive pricing. The liquidity coverage ratio of the bank at end-December 2019 was 113.57% as against the regulatory requirement of 100% and has increased to 112.18% at end-March 2020.

 


RATING SENSITIVITIES

Positive: Material progression on a more granular and retail liability profile, while sustaining the capital and operating buffers and maintaining credit costs could result in the Outlook being revised to back Stable.  

Negative: Any pressure on the deposit profile on account of a migration of few its large deposits or inability of the bank to reduce its depositor concentration or significantly higher-than-expected deterioration in the asset quality or capital buffers could lead to a negative rating action.


COMPANY PROFILE

in financing commercial and other vehicles along with providing corporate working capital loans. IBL has regularly raised common equity in the past few years from markets at significant premiums due to its strong profitability. It reached a balance sheet size of INR3.07 trillion in December 2019 with net profit of INR41.17 billion (9MFY19: INR29.4 billion). At end-3QFY20, the bank had a network of 1,851 branches and 2,721 ATMs across the country.

FINANCIAL SUMMARY 

Particulars

9MFY20

FY19

FY18

Total assets (INR billion)

3,079.43

2,778.19

2,216.26

Total equity (INR billion)

334.82

266.86

238.42

Net income (net profit) (INR billion)

41.17

33.01

36.06

Return on average assets (%)

1.87

1.39

1.9

Common equity tier 1 (%)*

12.07

12.07

13.42

Capital adequacy ratio (%)*

13.92

14.16

15.31

* excluding 9MFY20 profits
Source: Company, Ind-Ra 


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

3 June 2019

22 March 2019

29 March 2018

Issuer rating

Long-term/ Short-term

-

IND AA+/Negative/ 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+/Negative

IND AA+/Stable

IND AA+/Stable

IND AA+/Stable -

AT1 perpetual debt

Long-term

INR40

IND AA/Negative

IND AA/Stable

IND AA/Stable -

IND AA/Stable --

ANNEXURE

Instrument Type

ISIN

Date of  Issuance

Coupon Rate (%)

Maturity Date

Rated Amount (billion)

Rating/Outlook

Senior unsecured redeemable bonds

INE095A08041

31 March 2015

8.8

31 March 2022

INR5.0

IND AA+/Negative

Senior unsecured redeemable bonds

INE095A08058

9 December 2016

7.6

9 December 2026

INR15.0

IND AA+/Negative

 

Total

 

 

 

INR20

 

 

 

Instrument Type

ISIN

Date of  Issuance

Coupon Rate (%)

Maturity Date

Rated Amount (Billion)

Rating/Outlook

AT1 perpetual debt

INE095A08066

22 March 2017

9.5

Perpetual

INR10

IND AA/Negative

AT1 perpetual debt

INE095A08074

18 July 2017

9.5

Perpetual

INR10

IND AA/Negative

AT1 perpetual debt

INE095A08082

28 March 2019

10.5

Perpetual

INR14.90

IND AA/Negative

 

Utilised limit

 

 

 

INR34.90

 

 

Unutilised limit

 

 

 

 

INR5.10

 

 

Total

 

 

 

INR40.00

 


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. 

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. 

India Ratings is a 100% owned subsidiary of the Fitch Group.

For more information, visit www.indiaratings.co.in.

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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

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121