Rating Rationale
January 25, 2018 | Mumbai
CRISIL revises outlook on public sector banks to 'Stable' from 'Negative' 
Recapitalisation, peaking of asset quality issues, revival in credit growth to improve outlook 
 
CRISIL has revised its outlook on the long-term debt instruments (excluding Basel III Tier I) of 18 public sector banks (PSB) to 'Stable from 'Negative', while reaffirming their ratings.
 
The revision in outlook is primarily driven by government's PSB recapitalisation programme for this fiscal, which will improve the financial risk profile of these banks and also help them meet Basel III regulatory capital norms, and provide cushion against expected rise in provisioning for non-performing assets (NPAs).
 
The ratings on Basel III Tier I bonds of nine PSBs have also been reaffirmed, and the outlook has been retained as 'Negative'. CRISIL is evaluating the flexibility with banks to set off any accumulated losses with the bank's balance in share premium account and its implication on the availability of eligible reserves to service AT1 coupon payments. We will revisit our ratings on AT1 instruments once there is clarity.
 
On October 24, 2017 after the government announced its Rs 2.11 lakh crore recapitalisation plan, CRISIL had said that it was credit positive for public sector banks and when details of the capital infusion for individual PSBs are announced, it will consider those and take appropriate rating action.
 
On Wednesday, the government announced details of bank-wise infusion of ~Rs 88,000 crore capital this fiscal.
 
CRISIL has assessed the impact of this and believes with expected capital infusion from government, PSBs are now adequately placed to meet Basel III capital norms and are also better prepared to absorb the hit from provisioning on stressed assets and also on account of migration to Ind AS (Indian Accounting Standards).
 
The government has also outlined its banking reforms agenda. The strengthening of prudent lending practices through responsible banking - that is, banking based on core strengths, sharper pre- and post-disbursal monitoring for large exposures, and improving NPA resolution mechanisms (including separate asset management verticals), will structurally improve credit culture at PSBs.
 
Says Krishnan Sitaraman, Senior Director, CRISIL Ratings, 'The recapitalisation plan while emphasising government's support, also persuades public sector banks to up the ante on responsible banking. The upshot of more accountability, governance and efficiencies is a structurally stronger banking system and improved investor sentiment towards them'.
 
Asset quality issues are peaking for banks with incremental slippages to NPAs expected to taper in fiscal 2018 and 2019 as credit health of corporate borrowers' are improving. However, the resolution of large corporate stressed accounts under the Insolvency and Bankruptcy Code and the potential haircuts thereof are expected to increase the provisioning burden of PSBs and impact their earnings profile and capital position in the near term.
 
CRISIL will continue to monitor the performance of PSBs - their asset quality and profitability performance, and the capital support from the government in future and will appropriately factor in the same in the ratings of these banks.
 
Annexure 1 : List of rating actions on PSBs
Bank Tier II Bonds (Under Basel II & Basel III)/ Infrastructure Bonds Hybrid Instruments  (Under Basel II) Fixed Deposits Tier I Bonds (Under Basel III) Certificate of Deposits
Allahabad Bank CRISIL AA-/Stable (Outlook revised from Negative) CRISIL A+/Stable (Outlook revised from Negative)      
Andhra Bank CRISIL AA+/Stable (Outlook revised from Negative) CRISIL AA/Stable (Outlook revised from Negative)   CRISIL AA-/Negative (Reaffirmed)  
Bank of Baroda CRISIL AAA/Stable (Outlook revised from Negative) CRISIL AAA/Stable (Outlook revised from Negative)   CRISIL AA+/Negative (Reaffirmed)  
Bank of India CRISIL AA+/Stable (Outlook revised from Negative) CRISIL AA+/Stable (Outlook revised from Negative)   CRISIL A+/Negative (Reaffirmed) CRISIL A1+ (Reaffirmed)
Bank of Maharashtra CRISIL A+/Stable (Outlook revised from Negative) CRISIL A/Stable (Outlook revised from Negative)   CRISIL BBB+/Negative (Reaffirmed) CRISIL A1+ (Reaffirmed)
Canara Bank CRISIL AAA/Stable (Outlook revised from Negative) CRISIL AAA/Stable (Outlook revised from Negative)   CRISIL AA/Negative (Reaffirmed) CRISIL A1+ (Reaffirmed)
Central Bank of India CRISIL A+/Stable (Outlook revised from Negative) CRISIL A/Stable (Outlook revised from Negative)      
Corporation Bank CRISIL AA-/Stable (Outlook revised from Negative) CRISIL A+/Stable (Outlook revised from Negative) FAA+/Stable (Outlook revised from Negative) CRISIL A-/Negative (Reaffirmed)  
Dena Bank CRISIL AA-/Stable (Outlook revised from Negative) CRISIL A+/Stable (Outlook revised from Negative)   CRISIL A-/Negative (Reaffirmed) CRISIL A1+ (Reaffirmed)
IDBI Bank Ltd. CRISIL A+/Stable (Outlook revised from Negative) CRISIL A/Stable (Outlook revised from Negative) FAA/Stable (Outlook revised from Negative) CRISIL BBB+/Negative (Reaffirmed) CRISIL A1+ (Reaffirmed)
Indian Overseas Bank CRISIL A+/Stable (Outlook revised from Negative) CRISIL A-/Stable (Outlook revised from Negative) FAA/Stable (Outlook revised from Negative)   CRISIL A1+ (Reaffirmed)
Oriental Bank of Commerce     FAA+/Stable (Outlook revised from Negative)   CRISIL A1+ (Reaffirmed)
Punjab & Sind Bank CRISIL AA/Stable (Outlook revised from Negative)        
Punjab National Bank CRISIL AAA/Stable (Outlook revised from Negative) CRISIL AAA/Stable (Outlook revised from Negative)   CRISIL AA/Negative (Reaffirmed)  
Syndicate Bank CRISIL AA/Stable (Outlook revised from Negative) CRISIL AA/Stable (Outlook revised from Negative)      
UCO Bank CRISIL A+/Stable (Outlook revised from Negative) CRISIL A/Stable (Outlook revised from Negative)     CRISIL A1+ (Reaffirmed)
Union Bank of India CRISIL AA+/Stable (Outlook revised from Negative) CRISIL AA+/Stable (Outlook revised from Negative)      
United Bank of India CRISIL AA-/Stable (Outlook revised from Negative) CRISIL A/Stable (Outlook revised from Negative)   CRISIL BBB+/Negative (Reaffirmed) CRISIL A1+ (Reaffirmed)

Bank of Maharashtra
Rating outlook revised to 'Stable' ; ratings reaffirmed
 
Rating Action
Lower Tier-II Bonds (Under Basel II) Aggregating to Rs.1330 Crore  CRISIL A+/Stable (Outlook revised from 'Negative'; Rating reaffirmed)
Rs.400 Crore Upper Tier-II Bonds (Under Basel II) CRISIL A/Stable (Outlook revised from 'Negative'; Rating reaffirmed)
Rs.70 Crore Perpetual Tier-I Bonds (Under Basel II)  CRISIL A/Stable (Outlook revised from 'Negative'; Rating reaffirmed)
Rs.1000 Crore Tier-I Bonds (Under Basel III)  CRISIL BBB+/Negative (Reaffirmed)
Rs.1500 Crore Certificates of Deposit  CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its rating outlook on the lower Tier-II Bonds (under Basel II), and the Tier-I Perpetual Bonds and Upper Tier-II Bonds (hybrid instruments; under Basel II) of Bank of Maharashtra (BoM) to 'Stable' from 'Negative', while reaffirming the rating at 'CRISIL A+/CRISIL A'. Ratings on the tier-I bonds (under Basel III) and certificates of deposit programme have been reaffirmed at 'CRISIL BBB+/Negative/CRISIL A1+'.
 
The revision in the outlook on the Lower Tier-II Bonds (under Basel II), Tier-I Perpetual Bonds and Upper Tier-II Bonds (hybrid instruments; under Basel II) is primarily driven by government's recapitalisation plans for public sector banks (PSBs), including BoM, in the current fiscal. CRISIL believes this will improve the bank's financial risk profile, help meet Basel III regulatory capital norms, and provide a cushion against expected rise in provisioning for non-performing assets (NPAs). Additionally, the peaking of asset quality concerns and likely revival of credit growth over the medium term will support bank's performance.
 
The ratings continue to factor in the expectation of strong support from majority owner, Government of India, and a comfortable resource profile. The ratings also factor in the stress on BoM's asset quality and therefore increase in provisions would continue to impact profitability over the medium term. The bank's gross NPA ratio was high at 18.54% as on September 31, 2017 (16.93% as on March 31, 2017). Also, profitability remains weak with the bank reporting a return on assets (RoA) of -0.56% (annualised) for the half-year ended September 2017 (0.86% for fiscal 2017).  However, proposed capital infusion of (Rs 3173 crore in the current fiscal) under the PSBs recapitalisation plan will help absorb increase in provisioning burden and meet regulatory capital requirement. The ratings also factor in the bank's high regional concentration in operations.

Analytical Approach

For arriving at the ratings, CRISIL has considered the standalone business and financial risk profiles of BoM and has also factored in expected strong support from the government, BoM's majority shareholder.

Key Rating Drivers & Detailed Description
Strengths
* Strong expectation of support from government
The ratings continue to factor in expectation of strong government support, both on an ongoing basis and in the event of distress. This is because government is both the majority shareholder in PSBs and the guardian of India's financial system. Stability of the banking sector is of prime importance to the government, 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 BoM. As part of the 'Indradhanush' framework, 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, government had outlined recapitalisation package of Rs 2.11 lakh crore over fiscals 2018 and 2019, out of which PSBs will receive Rs 88,139 crore from the government in fiscal 2018. BoM has been allocated Rs 3173 crore (of which, Rs 650 crore has been received as Share Application Money Pending allotment in December 2017), out of this for the current fiscal.
 
BoM received a total equity capital of Rs 2082 crore from the government over the last four years (including conversion of preference share of Rs 588 crore in fiscal 2015), including Rs 300 crore infused in fiscal 2017. This indicates government's commitment to extend capital support to the bank. The bank also received Rs 400 crore of equity capital from Life Insurance Corporation of India in fiscal 2015. The CET I, Tier I, and overall capital adequacy ratios stood at 7.17%, 9.00%, and 11.28%, respectively, as on September 30, 2017. Furthermore, the bank raised Rs 313 crore via qualified institutional placement in December 2017.
 
* Comfortable resource profile
Resource profile is comfortable, reflected in the large proportion of low-cost current account and savings account (CASA) deposits, at 44.3% of total deposits as on September 30, 2017. The CASA deposits continued to be higher than the estimated average for the banking sector at 38.4%. Furthermore, total retail deposits constituted 95.92% of total deposits as on September 30, 2017. 
 
Weaknesses
* Weak asset quality
Asset quality has deteriorated sharply over the past few quarters, as reflected in the rise in gross NPAs to 18.54% as on September 30, 2017, from 16.93% as on March 31, 2017, and 9.34% as on March 31, 2016. Net NPAs were 12.68% as on September 30, 2017. Slippages to NPAs as a percentage of opening net advances in fiscal 2017 were high at 8.5%, and were mainly from the large, micro and small enterprise, and agriculture portfolios. However, slippages declined to 4.3% (annualised) in the half-year ended September 30, 2017.
 
In May 2017, Reserve Bank of India initiated prompt corrective action (PCA) for BoM. Under PCA, restrictions are likely to be placed on the bank, including on branch expansion, and dividend distribution.
 
CRISIL believes asset quality will remain under considerable pressure over the medium term, thereby putting pressure on credit risk profile, and will hence remain a key monitorable.
 
* Weak earnings
Sharp deterioration in asset quality has significantly affected profitability. The RoA declined sharply to a negative 0.86% for fiscal 2017 (0.07% for fiscal 2016), which is lower than the average for the banking sector. In fiscal 2017, net loss was Rs 1373 crore, against a net profit of Rs 101 crore for fiscal 2016. In the half-year ended September 30, 2017, net loss was Rs 435 crore. While the bank is focusing on improving the net interest margin by lending to high-yielding segments and managing operating expense, provisioning costs are likely to remain high over the next few quarters given continued slippages and higher provisioning requirement with ageing of NPAs. Ability to manage incremental slippages and recover from NPAs will be key determinants of profitability, especially given the relatively low provisioning coverage (excluding technical write-off) of 36.3% as on September 30, 2017.
 
* High regional concentration in operations
BoM remains exposed to risks related to concentration of its operations in Maharashtra, which accounted for 69.2% of the bank's business and 61.3% of its branches as on September 30, 2017. While BoM has opened branches outside the state, concentration risk is likely to reduce only in the long term.
 
Outlook Stable (Lower Tier-II Bonds (under Basel II), and the Tier-I Perpetual Bonds and Upper Tier-II Bonds (hybrid instruments; under Basel II))
CRISIL believes BoM will continue to benefit from strong government support, especially given the recent recapitalisation announcement. Asset quality and earnings profile are, however, expected to remain under pressure over the medium term.
 
Upward scenario:
The outlook may be revised to 'Positive' in case of a substantial and sustained improvement in asset quality and earnings profile.
 
Downward scenario:
The outlook may be revised to 'Negative' in case of sharper-than-expected deterioration in asset quality, resulting in further weakening of profitability.
 
Outlook: Negative (Tier-I Bonds (under Basel III))
CRISIL believes the expected stress in BoM's asset quality and earnings profile over the medium term would also affect the bank's eligible reserves position.
 
Upward scenario:
CRISIL is evaluating the flexibility with banks to set off any accumulated losses with the bank's balance in share premium account. Clarity on the same is likely to have positive implication on the availability of eligible reserves to service AT1 coupon payments and thereby the rating on the instruments.
 
Downward scenario:
The rating may be downgraded in case of deterioration in eligible reserves position. The rating may also be downgraded if there is further significant deterioration in asset quality or earnings profile. 
About the Bank

BoM is a medium-sized PSB, with assets of Rs 1,51,647 crore, and a network of 1883 branches and 1850 automated teller machines (ATMs) as on September 30, 2017; 56% of its branches are in rural and semi-urban areas. With deposits of Rs 1,35,097 crore and advances of Rs 92,965 crore, the bank had a market share of 1.3% and 1.2% of deposits and advances, respectively, in the banking system, as on September 30, 2017.
 
Net loss was Rs 1373 crore on net interest income of Rs 3175 crore in fiscal 2017, against a profit after tax (PAT) of Rs 101 crore on net interest income of Rs 3879 crore in fiscal 2016. Net loss was Rs 435 crore on total income (net of interest charges) of Rs 2490 crore for the half-year ended September 30, 2017, against a net loss of Rs 735 crore and total income (net of interest charges) of Rs 2280 crore for the corresponding period of the previous fiscal.

Key Financial Indicators
As on / for the period ended Sep 30 Unit 2017 2016
Total Assets Rs crore 151647 150975
Total income Rs crore 6513 6741
Profit after tax Rs crore (435) (735)
Gross NPA % 18.54% 14.08%
Overall capital adequacy ratio  % 11.28% 11.14%
Return on assets (annualized) % -0.55% -0.95%

Any other information
Annexure: Key features of BoM's Rs 1000 crore Tier I Bonds issue (under Basel III)

  • Non-Convertible Perpetual Unsecured subordinated Basel III-compliant Tier-I Bonds.
  • Coupon payments are on an annual basis and are non-cumulative.
  • The bank has full discretion at all times to cancel coupon payment (in full or in part).
  • Coupon is to be paid out of the current year's profit. However, if the current year's profit is not sufficient, that is, payment of coupon is likely to result in a loss during the current year, the coupon payment can be made out of eligible reserve (subject to the bank meeting minimum regulatory requirements for CET I, Tier-I, and total capital ratios at all times as prescribed by RBI and subject to the requirements of capital buffer frameworks) and/or credit balance in the profit and loss account.
  • Loss-absorption features as per RBI's BASEL III norms are applicable
    • Instrument will be temporarily written down on CET I breaching the pre-specified trigger of 5.5% before March 31, 2019, and 6.125% on and after March 31, 2019.
    • Instrument may be permanently written down at the option of RBI on occurrence of trigger event called point of non-viability (PONV) trigger.
    • The PONV trigger shall be determined by RBI.
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 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.

Note on non-equity Tier-I capital instruments (Under Basel III):
The distinguishing features of non-equity Tier-I capital instruments (under Basel III) are the existence of coupon discretion at all times, high capital thresholds for likely coupon non-payment, and principal write-down (on breach of a pre-specified trigger). These features increase the risk attributes of non-equity Tier-I instruments, over those of Tier-II instruments under Basel III, and capital instruments under Basel II. To factor in these risks, CRISIL notches down the rating on these instruments from the bank's corporate credit rating. The rating on the Tier-I Bonds (under Basel III) has, therefore, been lowered by three notches from BoM’s corporate credit rating, to 'CRISIL BBB+/Negative', in line with CRISIL's criteria (refer to 'CRISIL's rating criteria for Basel III-compliant instruments of banks').

Under the criteria for Tier I bonds (under Basel III), CRISIL evaluates the bank’s i) reserves position (adjusted for any medium-term stress in profitability) and ii) cushion over regulatory minimum common equity Tier I (CET1; including CCB) capital ratios. CRISIL also evaluates the bank’s demonstrated track record and management philosophy regarding maintaining sufficient CET1 capital cushion above the minimum regulatory requirements. BoM’s eligible reserves to total assets was low at around 1.3%, with CET1 capital buffer at 0.53%, as on March 31, 2017 (CET1 ratio of 7.28% compared with the regulatory minimum of 6.75%).

The factors that could trigger a default event for non-equity Tier-I capital instruments (under Basel III) resulting in non-payment of coupon include: i) the bank exercising coupon discretion; ii) inadequacy of eligible reserves to honour coupon payment if the bank reports losses or low profits; or iii) the bank breaching the minimum regulatory Common Equity Tier-1 (CET I; including Capital Conservation Buffer) ratio. Moreover, given the additional risk attributes, the rating transition for non-equity Tier-I capital instruments (under Basel III) can potentially be higher than that for Tier-II instruments.
 
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs Crore) Outstanding rating
with Outlook
INE457A09165 Perpetual Tier-I Bonds (under Basel II) 30-Sep-09 9.25 Perpetual 70.00 CRISIL A/Stable
INE457A09215 Tier I Bonds (Under Basel III) 12-Jan-15 9.48 Perpetual 1000.00 CRISIL BBB+/Negative
INE457A09157 Upper Tier-II Bonds (under Basel II) 30-Sep-09 8.95 30-Sep-24 100.00 CRISIL A/Stable
INE457A09173 Upper Tier-II Bonds (under Basel II) 1-Feb-10 8.65 1-Feb-25 300.00 CRISIL A/Stable
INE457A09132 Lower Tier-II Bonds (under Basel II) 15-Jan-08 9.20 15-Apr-18 200.00 CRISIL A+/Stable
INE457A09140 Lower Tier-II Bonds (under Basel II) 30-Sep-09 8.74 30-Apr-19 130.00 CRISIL A+/Stable
INE457A09199 Lower Tier-II Bonds (under Basel II) 31-Dec-12 9.00 31-Dec-22 1000.00 CRISIL A+/Stable
NA Certificates of Deposit NA NA NA 1500.00 CRISIL A1+
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Certificate of Deposits  ST  1500  CRISIL A1+    No Rating Change    No Rating Change    No Rating Change    No Rating Change  CRISIL A1+ 
Lower Tier-II Bonds (under Basel II)  LT  1330  CRISIL A+/Stable    No Rating Change  30-08-17  CRISIL A+/Negative  04-10-16  CRISIL AA-/Negative  21-10-15  CRISIL AA/Negative  CRISIL AA+/Stable 
                    10-04-15  CRISIL AA+/Negative   
Perpetual Tier-I Bonds (under Basel II)  LT  70  CRISIL A/Stable    No Rating Change  30-08-17  CRISIL A/Negative  04-10-16  CRISIL A+/Negative  21-10-15  CRISIL AA-/Negative  CRISIL AA/Stable 
                    10-04-15  CRISIL AA/Negative   
Tier I Bonds (Under Basel III)  LT  1000  CRISIL BBB+/Negative    No Rating Change  30-08-17  CRISIL BBB+/Negative  04-10-16  CRISIL A-/Negative  21-10-15  CRISIL A+/Negative  CRISIL AA-/Stable 
                    10-04-15  CRISIL AA-/Negative   
Upper Tier-II Bonds (under Basel II)  LT  400  CRISIL A/Stable    No Rating Change  30-08-17  CRISIL A/Negative  04-10-16  CRISIL A+/Negative  21-10-15  CRISIL AA-/Negative  CRISIL AA/Stable 
                    10-04-15  CRISIL AA/Negative   
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Criteria for rating short term debt

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