| Canara Bank | ||||||||||||
| Rated amount enhanced | ||||||||||||
| Rating Action | ||||||||||||
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| 1 crore = 10 million | ||||||||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has reaffirmed its 'CRISIL AAA/CRISIL AA/Stable/CRISIL A1+' ratings on the long-term debt instruments and certificates of deposit programme of Canara Bank. CRISIL has withdrawn its rating on the lower Tier-II bonds (under Basel II) aggregating Rs 1,025 crore at the bank's request. The rating action is in line with CRISIL's policy on withdrawal of ratings. |
| Analytical Approach |
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For arriving at the ratings, CRISIL has considered the standalone business and financial risk profiles of Canara Bank, and factored in the support the bank is expected to receive from GoI. 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, the 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. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Strong expectation of support from GoI In its ratings on 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. GoI infused Rs 4,865 crore in Canara Bank in fiscal 2018 (Rs 745 crore in fiscal 2017). * Healthy market position Canara Bank is one of India's larger PSBs, with total advances and deposits at Rs 4.2 lakh crore and Rs 5.8 lakh crore, respectively, as on December 31, 2018. It had a market share of around 4.5% and 4.9%, respectively, in advances and deposits. The bank also has a pan-India branch presence, with around 6307 branches and 9004 automated teller machines across the country as on December 31, 2018. 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 capitalisation The bank has adequate capitalisation, underpinned by its sizeable networth of Rs 36,534 crore as on December 31, 2018. The Tier I capital and overall capital adequacy ratio (CAR) stood at 9.54% and 12.21%, respectively, as on December 31, 2018. However, given asset quality pressure, the networth coverage for net non-performing assets (NPAs) stood at 1.37 times as on December 31, 2018. GoI infused Rs 745 crore and Rs 4,865 crore as equity capital in the bank in fiscals 2017 and 2018, respectively. Weaknesses: * Modest asset quality Asset quality is modest, with gross NPAs of 10.25% as on December 31, 2018 (11.84% as on March 31, 2018). Although the slippages were high for the bank in fiscal 2018, it decreased over last couple of quarters (annualised slippage ratio of 4.54% during nine months ended December 31, 2018, as against 7.24% in fiscal 2018). The slippages are primarily from the bank's large corporate exposure to vulnerable sectors such as iron and steel, infrastructure and construction. Its micro and small enterprises exposure also experienced elevated levels of stress. However, the gross NPA levels have declined quarter on quarter in fiscal 2019. The bank is focusing on recoveries, including through the Insolvency and Bankruptcy Code route, which is expected to aid the asset quality performance over the medium term. * Average earnings profile Canara Bank's earning profile is expected to remain average in the near to medium term due to higher provisioning costs due to pressure on asset quality. Canara Bank's credit cost was 1.5% (annualized) for the nine months ended December 31, 2018 (2.7% in fiscal 2018). Provisioning coverage ratio (excluding technical write-offs) increased to 40.4% as on December 31, 2018, from 39.8% as on March 31, 2018; 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 been restricted over the last few years due to the pressure on net interest margins, high provisioning costs and subdued growth in the loan book. The bank reported a net loss of Rs 4,222 crore in fiscal 2018 as against profit after tax (PAT) of Rs 1,122 crore in fiscal 2017. However, for the nine months ended December 31, 2018, the bank reported a profit of Rs 899 crore. Margins, although constrained, improved to 2.3% (annualized) for the nine months ended December 31, 2018, from 2.0% 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. |
| Liquidity |
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The bank has adequate liquidity, supported by a sizeable retail deposit base that forms a significant part of the total deposits. Liquidity coverage ratio was 103.14% as on December 31, 2018, against the regulatory requirement of 90%. The excess statutory liquidity ratio was Rs 23315 crore (4.43%) as on that date. The bank's liquidity also benefits from access to systemic sources of funds such as the liquidity adjustment facility from the Reserve Bank of India, access to the call money market, and refinance limits from sources such as National Housing Bank and National Bank for Agriculture and Rural Development. |
| Outlook: Stable |
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CRISIL believes the Canara Bank will continue to benefit from the strong support received 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. The outlook may be revised to 'Negative' if a significant deterioration in asset quality or earnings profile, leading to deterioration in capitalization. |
| About the Bank |
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Canara Bank is one of the larger PSB by assets and has a pan-India presence, with a network of 6307 branches as on December 31, 2018. Besides banking, it undertakes factoring, asset management, insurance, and retail and institutional broking services through its subsidiaries and associates. Its overseas advances account for close to 6% of the total advances with operations spread across seven countries. |
| Key Financial Indicators | ||||||||||||||||||||||||||||
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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 non-equity Tier 1 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 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 honor coupon payment if the bank reports low profit or a loss, or iii) the bank breaching the minimum regulatory CET I, including CCB, ratios. Moreover, given their 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) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
^yet to be issued |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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