Rating Rationale

Strengths
* Strong expectation of support from GoI
In its ratings on public sector banks (PSBs), CRISIL continues to factor in the strong government support as the Central government is both the majority shareholder and the guardian of India's financial system. Stability of the banking sector is of prime importance to the government, given criticality of the sector to the economy, strong public perception of sovereign backing for PSBs, and severe implications of failure of any PSB in terms of political fallout, systemic stability, and investor confidence in public sector institutions. Majority ownership creates a moral obligation on the government to support PSBs, including Canara Bank. As part of the Indradhanush framework, government has pledged to infuse at least Rs 70,000 crore in PSBs between 2015-19, of which Rs 25,000 crore each was infused in fiscals 2016 and 2017. Further, in October 2017, the government had outlined recapitalization package of Rs 2.11 lakh crores over fiscals 2018 and 2019, out of which PSBs will receive Rs 88,139 crore from the government in fiscal 2018. Canara Bank has been allocated Rs 4,865 crore out of this for the current fiscal.The government had also infused Rs 743 crore as equity capital in Canara bank in fiscal 2017.

* Strong market position
Canara Bank is India's fifth largest PSB in terms of assets. It had a market share of around 4.64% and 4.60%, respectively, in deposits and advances as on September30, 2017. The bank also has a pan-India branch presence, with around 6179 branches and 9743 automated teller machines across the country as on December 31, 2017. The bank's revenue profile is also diversified across businesses, products, and geographies, augmenting its strong overall market position. The bank has a strong franchise in the large and mid-size corporate banking segments.

* Adequate capitalization
The bank has adequate capitalisation, underpinned by its sizeable networth of Rs 34,220 crore as December 31, 2017. Thetier I capital and overall CAR stood at 9.57% and 12.49%, respectively, as on December 31,, 2017 (9.01% and 12.28% as on December 31, 2017). The net worth coverage for net NPAs stood at 1.35 times as on December 31, 2017 (1.56 times as on March 31, 2017), which remains higher than the industry average. The GOI infused Rs 743 crores as equity capital in the bank in fiscal 2017 and as per the recent announcement, another Rs 4,865 crore will be infused by end of fiscal 2018 which will strengthen its capital position.

Weaknesses
* Modest asset quality
Asset quality is modest as reflected by its gross non-performing assets (NPAs) of 10.38% as on December 31, 2017 (10.58% as on September 30, 2017). Although the slippages remained high for the bank in the past few quarters (annualized slippage ratio of 4.5% in 9MFY2018 as against 3.6% in fiscal 2017), primarily from the bank's large corporate exposure to vulnerable sectors such as iron and steel, infrastructure and construction, it has witnessed decline in its slippages quarter-on-quarter in fiscal 2018. Its micro and small enterprises exposure also experienced elevated levels of stress. CRISIL expects pressure on asset quality to persist in the near term. However, the bank is focusing on recoveries, including through the IBC route, which is expected to aid the asset qualityperformance over the medium term.

* Moderate earnings profile
Canara Bank's earning profile is expected to remain under pressure in the near to medium term on account of higher provisioning costs due to its weak asset quality. Canara Bank's credit cost stood at1.6% as on December 31, 2017 (1.1% as on December 31,, 2016). Provisioning coverage ratio (excluding technical write-offs) increased to 34.7% as on December 31, 2017 from 32.6% as on December 31, 2016, however, it remains lower than the industry average. Low provisioning coverage ratio makes its earnings susceptible to rise in provisioning costs.

Canara Bank's earnings profile has remained under pressure over the last few years primarily on account of pressure on net interest margins (NIM), high provisioning costs and subdued growth in the loan book.However, it was offset to an extent by the higher treasury gains, especially in the last quarter of fiscal 2017. The bank reported a PAT of Rs 1122 crore in fiscal 2017 as against a loss of Rs 2813 crore in fiscal 2016. Margins, although under pressure,improved to 2.1% for the nine months ended December 31, 2017, (1.6% in the corresponding period of the previous fiscal). The bank's ability to arrest asset quality deterioration, the resultant provisioning costs and thereby the impact on profitability will remain a key rating monitorable over the medium term.

Outlook: Stable (Tier II bonds (under Basel III), Lower Tier-II bonds and Upper Tier-II bonds (under Basel II) and Tier-I Perpetual Bonds (under Basel II))
CRISIL believes that Canara Bank will continue to benefit from strong support from GoI, especially given the recent recapitalisation announcement. The bank's asset quality and earnings profile are however, expected to remain under pressure over the medium term.

Downward scenario:
The outlook may be revised to 'Negative' in case of further significant deterioration in its asset quality or earnings profile.

Outlook: Negative (Tier-I Bonds (under Basel III))
CRISIL believes that the expected stress in Canara Bank's asset quality and earnings profile over the medium term would impact 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 its asset quality or earnings profile.