Rating Rationale
May 21, 2018 | Mumbai
Allahabad Bank
Ratings placed on 'Watch Developing'
 
Rating Action
Rs.500 Crore Tier II Bonds (Under Basel III)   CRISIL AA- (Placed on 'Rating Watch with Developing Implications')
Rs.1000 Crore Tier II Bonds (Under Basel III)   CRISIL AA- (Placed on 'Rating Watch with Developing Implications')
Lower Tier II Bonds (Under Basel II) Aggregating Rs.850 Crore   CRISIL AA- (Placed on 'Rating Watch with Developing Implications')
Upper Tier II Bonds (Under Basel II) Aggregating Rs.1000 Crore   CRISIL A+ (Placed on 'Rating Watch with Developing Implications')
Tier I Perpetual Bonds (Under Basel II) Aggregating Rs.300 Crore   CRISIL A+ (Placed on 'Rating Watch with Developing Implications')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has placed its 'CRISIL AA-/CRISIL A+' ratings on the debt instruments of Allahabad Bank on 'Rating Watch with Developing Implications'.
 
The rating action has been undertaken as the bank reported Tier I and overall capital adequacy ratios of 6.69% and 8.69%, respectively, as on March 31, 2018 (8.49% and 11.45% the previous year). The ratios were below the regulatory requirement (excluding capital conservation buffer) of 7% and 9%, respectively, and declined sharply due to loss of Rs 4,674 crore in fiscal 2018. Losses incurred were on account of elevated provisioning, following higher slippages owing to stricter guidelines by the Reserve Bank of India (RBI) regarding resolution of stressed assets, and ageing of non-performing assets (NPAs). The bank also redeemed additional Tier I bonds issued under Basel III in May 2018, resulting in further decline in the ratios as on date.
 
Corrective actions are being undertaken, such as initiating sale of non-core assets, restricting the expansion of risk-weighted assets, and reducing exposure to unrated and high risk advances. Strong support is also expected from the government on an ongoing basis. Additional capital infusion over the near term, nevertheless, is critical to restore and maintain capital adequacy ratios at above regulatory levels. The watch will be resolved once CRISIL receives more clarity on the timing and extent of the bank's capital-raising plan, and its impact on the ratios.
 
The ratings continue to reflect expectation of strong support from the majority owner, the Government of India (GoI), and comfortable resource profile. Current account and savings account (CASA) deposits accounted for 46.5% of its total deposits as on March 31, 2018. Cost of deposits improved to 5.33% for fiscal 2018, from 5.94% for fiscal 2017.
 
The ratings also factors in stress on asset quality, especially in the corporate portfolio, and resultant decline in earnings profile due to high provisioning requirement. The bank's gross NPAs was high at 15.96% as on March 31, 2018 (13.09% as on March 31, 2017). Also, profitability remains weak with the bank reporting a return on assets of negative 1.96% for fiscal 2018 (negative 0.13% for fiscal 2017).

Analytical Approach

For arriving at the ratings, CRISIL has considered the standalone business and financial risk profiles of Allahabad Bank. CRISIL has also factored in the support that the bank is expected to receive from GoI.  

Key Rating Drivers & Detailed Description
Strengths
* Expectation of strong support from majority owner, the GoI:
The rating continues to factor in an expectation of strong government support, both on an ongoing basis and in the event of distress. This is because GoI is both the majority shareholder in public sector banks (PSBs) and the guardian of India's financial system. The stability of the banking sector is of prime importance to GoI, given the criticality of the sector to the economy, strong public perception of sovereign backing for PSBs, and the severe implications of any PSB failure in terms of political fallout, systemic stability, and investor confidence in public sector institutions. CRISIL believes that the majority ownership creates a moral obligation on GoI to support the PSBs, including Allahabad Bank. As part of the Indradhanush framework, the government has pledged to infuse at least Rs 70,000 crore in PSBs during fiscals 2015-19, of which Rs 25,000 crore each was infused in fiscals 2016 and 2017. Furthermore, in October 2017, the government outlined a recapitalisation package of Rs 2.11 lakh crore over fiscals 2018 and 2019, of which PSBs received Rs 88,139 crore in fiscal 2018. The Rs 1,500 crore allocated to Allahabad Bank was received in March 2018.
 
* Comfortable resource profile:
CASA deposits, as a proportion of overall deposits, increased to 46.5% as of March 31, 2018, from 32.35% a couple of years ago. Increase in CASA is partly attributed to demonetisation, which attracted a large volume of low-cost deposits into the banking system. Resource profile should remain comfortable over the medium term, supported by the bank's well-established market position in central and eastern India, where a stable deposit base has been maintained.
 
Weakness
* Weakened capitalisation
Capitalisation has weakened with Tier I and overall capital adequacy ratios (under Basel III) of 6.69% and 8.69% respectively as on March 31, 2018 (8.49% and 11.45% respectively as on March 31, 2017). Networth was Rs 7,711 crore as on March 31, 2018 (Rs 11,696 crore the previous year). Networth coverage for net NPAs was low at 0.6 times as on March 31, 2018. Capitalisation should improve over the medium term, primarily backed by support from GoI and reduction of risk-weighted assets. However, improving capital adequacy ratios over near term and maintaining it at above regulatory levels on a steady state basis remains critical and is a key rating sensitivity factor.
 
* Weak asset quality
Asset quality remains under stress, with gross NPAs at 15.96% as on March 31, 2018, as against 13.09% for March 31, 2017. The absolute level of gross NPAs increased to Rs 26,563 crore as on March 31, 2018, from Rs 20,688 crore the previous year. Asset quality remains susceptible to sizeable exposure to vulnerable sectors such as infrastructure and construction. The bank is, however, focusing on improving its collection and recovery mechanism. Asset quality is peaking, and incremental slippages are likely to be lower going forward. The ability to control slippages and increase the loan portfolio in less risky segments nevertheless remains a key monitorable over the medium term.
 
* Weak earnings profile
Earnings have been impacted by the deterioration in asset quality. The bank reported net losses of Rs 4,674 crore and Rs 314 crore in fiscals 2018 and 2017, respectively. The losses were mainly due to higher provisioning costs and contraction in net interest margin (NIM; net interest income to average total assets). Provisioning costs against NPAs, as a proportion of average total assets, increased to 4.22% in fiscal 2018 from 1.91% in fiscal 2017. NIM declined to 1.93% in fiscal 2018 from 2.22% the previous fiscal because of interest reversals and shrinkage in performing advances. Pressure on earnings should persist over the near term on account of higher provisioning requirement, resulting from ageing NPAs.
About the Bank

Founded in April 1865 by a group of Europeans in Allahabad (Uttar Pradesh), Allahabad Bank is a medium-sized public sector bank with an asset base of Rs 2.5 lakh crore, and network of 3,245 domestic branches as on March 31, 2018.

In fiscal 2018, total income (net of interest expenses) was Rs 7,425 crore and net loss was Rs 4,674 crore, as against total income (net of interest expenses) of Rs 7,931 crore and a net loss of Rs 314 crore in fiscal 2017.

Key Financial Indicators
As on / for the fiscal ended March 31   2018 2017
Total assets Rs crore 252,714 237,038
Total income Rs crore 19,051 20,305
Profit after tax Rs crore -4674 -314
Gross NPA % 15.96 13.09
Overall capital adequacy ratio % 8.69 11.45
Return on assets % -1.96 -0.13

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Note on Tier-II Instruments (Under Basel III)
The distinguishing feature of Tier-II capital instruments under Basel II is the existence of the point of non-viability (PONV) trigger, the occurrence of which may result in loss of principal to the investors and hence, to default on the instrument by the issuer. According to the Basel III guidelines, the PONV trigger will be determined by the Reserve Bank of India (RBI). CRISIL believes the PONV trigger is a remote possibility in the Indian context, given the robust regulatory and supervisory framework, and systemic importance of the banking sector. The inherent risk associated with the PONV feature is adequately factored into the rating on the instrument.
 
Note on hybrid Instruments (Under Basel II)
Given that hybrid capital instruments (Tier-I perpetual bonds and Upper Tier-II bonds; under Basel II) have characteristics that set them apart from Lower Tier-II bonds (under Basel II), the ratings on the two instruments may not necessarily be identical. The factors that could trigger a default event for hybrid instruments include: the bank breaching the regulatory minimum capital requirement, or the regulator's denial of permission to the bank to make payments of interest and principal if the bank reports losses. Hence, the transition from one rating category to another may be significantly sharper for these instruments than in the case of Lower Tier-II bonds; this is because debt servicing on hybrid instruments is far more sensitive to the bank's overall capital adequacy levels and profitability.
 
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size
(Rs crore)
Outstanding rating
with outlook
INE428A08028 Tier II Bonds (Basel III) - Series I 20-Jan-2015 8.78% 20-Jan-2025 500 CRISIL AA-/Watch Developing
INE428A08044 Tier II Bonds (Basel III) - Series II 21-Dec-2015 8.64% 20-Dec-2025 1000 CRISIL AA-/Watch Developing
INE428A09083 Lower Tier II Bonds (Basel II) - Series VIII 26-Mar-2009 9.23% 26-Mar-2019 400 CRISIL AA-/Watch Developing
INE428A09109 Lower Tier II Bonds (Basel II) - Series IX 4-Aug-2009 8.45% 4-Aug-2019 450 CRISIL AA-/Watch Developing
INE428A09075 Upper Tier II Bonds (Basel II) - Series I 19-Mar-2009 9.28% 19-Mar-2024 500 CRISIL A+/Watch Developing
INE428A09117 Upper Tier II Bonds (Basel II) - Series II 18-Dec-2009 8.58% 18-Dec-2024 500 CRISIL A+/Watch Developing
INE428A09091 Tier I Perpetual Bonds (Basel II) - Series I 30-Mar-2009 9.20% NA 150 CRISIL A+/Watch Developing
INE428A09125 Tier I Perpetual Bonds (Basel II) - Series II 18-Dec-2009 9.08% NA 150 CRISIL A+/Watch Developing
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Lower Tier-II Bonds (under Basel II)  LT  850.00
21-05-18 
CRISIL AA-/Watch Developing  07-02-18  CRISIL AA-/Stable  12-09-17  CRISIL AA-/Negative  04-11-16  CRISIL AA-/Negative  14-12-15  CRISIL AA+/Negative  CRISIL AA+/Negative 
        25-01-18  CRISIL AA-/Stable  17-02-17  CRISIL AA-/Negative  10-03-16  CRISIL AA/Negative       
                16-02-16  CRISIL AA/Negative       
Perpetual Tier-I Bonds (under Basel II)  LT  0.00
21-05-18 
CRISIL A+/Watch Developing  07-02-18  CRISIL A+/Stable  12-09-17  CRISIL A+/Negative  04-11-16  CRISIL A+/Negative  14-12-15  CRISIL AA/Negative  CRISIL AA/Negative 
        25-01-18  CRISIL A+/Stable  17-02-17  CRISIL A+/Negative  10-03-16  CRISIL AA-/Negative       
                16-02-16  CRISIL AA-/Negative       
Tier I Bonds (Under Basel III)  LT    --    --  17-02-17  Withdrawal  04-11-16  CRISIL A-/Negative    --  -- 
                10-03-16  CRISIL A/Negative       
                16-02-16  CRISIL A/Negative       
Tier II Bonds (Under Basel III)  LT  1500.00
21-05-18 
CRISIL AA-/Watch Developing  07-02-18  CRISIL AA-/Stable  12-09-17  CRISIL AA-/Negative  04-11-16  CRISIL AA-/Negative  14-12-15  CRISIL AA+/Negative  CRISIL AA+/Negative 
        25-01-18  CRISIL AA-/Stable  17-02-17  CRISIL AA-/Negative  10-03-16  CRISIL AA/Negative       
                16-02-16  CRISIL AA/Negative       
Upper Tier-II Bonds (under Basel II)  LT  1000.00
21-05-18 
CRISIL A+/Watch Developing  07-02-18  CRISIL A+/Stable  12-09-17  CRISIL A+/Negative  04-11-16  CRISIL A+/Negative  14-12-15  CRISIL AA/Negative  CRISIL AA/Negative 
        25-01-18  CRISIL A+/Stable  17-02-17  CRISIL A+/Negative  10-03-16  CRISIL AA-/Negative       
                16-02-16  CRISIL AA-/Negative       
All amounts are in Rs.Cr.
Links to related criteria
Rating Criteria for Banks and Financial Institutions
Criteria for Notching up Stand Alone Ratings of Entities Based on Government Support
Rating Criteria for Hybrid Capital instruments issued by banks under Basel II guidelines
Rating criteria for Basel III - compliant non-equity capital instruments

For further information contact:
Media Relations
Analytical Contacts
Customer Service Helpdesk
Saman Khan
Media Relations
CRISIL Limited
D: +91 22 3342 3895
B: +91 22 3342 3000
saman.khan@crisil.com

Naireen Ahmed
Media Relations
CRISIL Limited
D: +91 22 3342 1818
B: +91 22 3342 3000
naireen.ahmed@crisil.com

Jyoti Parmar
Media Relations
CRISIL Limited
D: +91 22 3342 1835
B: +91 22 3342 3000
 jyoti.parmar@crisil.com

Krishnan Sitaraman
Senior Director - CRISIL Ratings
CRISIL Limited
D:+91 22 3342 8070
krishnan.sitaraman@crisil.com


Ajit Velonie
Director - CRISIL Ratings
CRISIL Limited
D:+91 22 4097 8209
ajit.velonie@crisil.com


Pratik Bagrecha
Rating Analyst - CRISIL Ratings
CRISIL Limited
D:+91 22 3342 3393
Pratik.Bagrecha@crisil.com
Timings: 10.00 am to 7.00 pm
Toll free Number:1800 267 1301

For a copy of Rationales / Rating Reports:
CRISILratingdesk@crisil.com
 
For Analytical queries:
ratingsinvestordesk@crisil.com


 

Note for Media:
This rating rationale is transmitted to you for the sole purpose of dissemination through your newspaper / magazine / agency. The rating rationale may be used by you in full or in part without changing the meaning or context thereof but with due credit to CRISIL. However, CRISIL alone has the sole right of distribution (whether directly or indirectly) of its rationales for consideration or otherwise through any media including websites, portals etc.


About CRISIL Limited

CRISIL is a leading agile and innovative, global analytics company driven by its mission of making markets function better. We are India’s foremost provider of ratings, data, research, analytics and solutions. A strong track record of growth, culture of innovation and global footprint sets us apart. We have delivered independent opinions, actionable insights, and efficient solutions to over 1,00,000 customers.
 
We are majority owned by S&P Global Inc., a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide.
 
For more information, visit www.crisil.com 


Connect with us: TWITTER | LINKEDIN | YOUTUBE | FACEBOOK

About CRISIL Ratings
CRISIL Ratings is part of CRISIL Limited (“CRISIL”). We pioneered the concept of credit rating in India in 1987. CRISIL is registered in India as a credit rating agency with the Securities and Exchange Board of India (“SEBI”). With a tradition of independence, analytical rigour and innovation, CRISIL sets the standards in the credit rating business. We rate the entire range of debt instruments, such as, bank loans, certificates of deposit, commercial paper, non-convertible / convertible / partially convertible bonds and debentures, perpetual bonds, bank hybrid capital instruments, asset-backed and mortgage-backed securities, partial guarantees and other structured debt instruments. We have rated over 24,500 large and mid-scale corporates and financial institutions. CRISIL has also instituted several innovations in India in the rating business, including rating municipal bonds, partially guaranteed instruments and microfinance institutions. We also pioneered a globally unique rating service for Micro, Small and Medium Enterprises (MSMEs) and significantly extended the accessibility to rating services to a wider market. Over 1,10,000 MSMEs have been rated by us.


CRISIL PRIVACY NOTICE

CRISIL respects your privacy. We use your contact information, such as your name, address, and email id, to fulfil your request and service your account and to provide you with additional information from CRISIL and other parts of S&P Global Inc. and its subsidiaries (collectively, the “Company) you may find of interest.

For further information, or to let us know your preferences with respect to receiving marketing materials, please visit https://www.crisil.com/en/home/privacy-and-cookie-notice.html. You can view the Company’s Customer Privacy at https://www.spglobal.com/corporate-privacy-policy

Last updated: April 2016


DISCLAIMER

This disclaimer forms part of and applies to each credit rating report and/or credit rating rationale that we provide (each a “Report”). For the avoidance of doubt, the term “Report” includes the information, ratings and other content forming part of the Report. The Report is intended for the jurisdiction of India only. This Report does not constitute an offer of services. Without limiting the generality of the foregoing, nothing in the Report is to be construed as CRISIL providing or intending to provide any services in jurisdictions where CRISIL does not have the necessary licenses and/or registration to carry out its business activities referred to above. Access or use of this Report does not create a client relationship between CRISIL and the user.

We are not aware that any user intends to rely on the Report or of the manner in which a user intends to use the Report. In preparing our Report we have not taken into consideration the objectives or particular needs of any particular user. It is made abundantly clear that the Report is not intended to and does not constitute an investment advice. The Report is not an offer to sell or an offer to purchase or subscribe for any investment in any securities, instruments, facilities or solicitation of any kind or otherwise enter into any deal or transaction with the entity to which the Report pertains. The Report should not be the sole or primary basis for any investment decision within the meaning of any law or regulation (including the laws and regulations applicable in the US).

Ratings from CRISIL Rating are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities / instruments or to make any investment decisions. Any opinions expressed here are in good faith, are subject to change without notice, and are only current as of the stated date of their issue. CRISIL assumes no obligation to update its opinions following publication in any form or format although CRISIL may disseminate its opinions and analysis. CRISIL rating contained in the Report is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment or other business decisions. The recipients of the Report should rely on their own judgment and take their own professional advice before acting on the Report in any way.

Neither CRISIL nor its affiliates, third party providers, as well as their directors, officers, shareholders, employees or agents (collectively, “CRISIL Parties”) guarantee the accuracy, completeness or adequacy of the Report, and no CRISIL Party shall have any liability for any errors, omissions, or interruptions therein, regardless of the cause, or for the results obtained from the use of any part of the Report. EACH CRISIL PARTY DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall any CRISIL Party be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of any part of the Report even if advised of the possibility of such damages.

CRISIL Ratings may receive compensation for its ratings and certain credit-related analyses, normally from issuers or underwriters of the instruments, facilities, securities or from obligors. CRISIL’s public ratings and analysis as are required to be disclosed under the regulations of the Securities and Exchange Board of India (and other applicable regulations, if any) are made available on its web sites, www.crisil.com (free of charge). Reports with more detail and additional information may be available for subscription at a fee – more details about CRISIL ratings are available here: www.crisilratings.com.

CRISIL and its affiliates do not act as a fiduciary. While CRISIL has obtained information from sources it believes to be reliable, CRISIL does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives and / or relies in its Reports. CRISIL keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of the respective activity. As a result, certain business units of CRISIL may have information that is not available to other CRISIL business units. CRISIL has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. CRISIL has in place a ratings code of conduct and policies for analytical firewalls and for managing conflict of interest. For details please refer to: https://www.crisil.com/en/home/our-businesses/ratings/regulatory-disclosures/highlighted-policies.html

CRISIL’s rating criteria are generally available without charge to the public on the CRISIL public web site, www.crisil.com. For latest rating information on any instrument of any company rated by CRISIL you may contact CRISIL RATING DESK at CRISILratingdesk@crisil.com, or at (0091) 1800 267 1301.

This Report should not be reproduced or redistributed to any other person or in any form without a prior written consent of CRISIL.

All rights reserved @ CRISIL