Rating Rationale
September 08, 2017 | Mumbai
Canara Bank
Ratings Reaffirmed  
 
Rating Action
Rs.2500 Crore Tier I Bonds (Under Basel III)  CRISIL AA/Negative (Reaffirmed)
Rs.3000 Crore Tier II Bonds (Under Basel III)  CRISIL AAA/Negative (Reaffirmed)
Rs.2400 Crore Tier II Bonds (Under Basel III)  CRISIL AAA/Negative (Reaffirmed)
Rs.2500 Crore Tier II Bonds (Under Basel III)  CRISIL AAA/Negative (Reaffirmed)
Upper Tier-II Bonds Aggregating Rs.1000 Crore (Under Basel II) (Reduced from Rs.2000 Crore) CRISIL AAA/Negative (Reaffirmed)
Perpetual Tier-I Bonds Aggregating Rs.1589.6 Crore (Under Basel II) CRISIL AAA/Negative (Reaffirmed)
Lower Tier-II Bonds Aggregating Rs.1025 Crore (Under Basel II) (Reduced from Rs.2500 Crore) CRISIL AAA/Negative (Reaffirmed)
Rs.20000 Crore Certificate of Deposits Programme (Reduced from Rs.50000 Crore) CRISIL A1+ (Reaffirmed) 
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its ratings on the existing debt instruments of Canara Bank at 'CRISIL AAA/CRISIL AA/Negative/CRISIL A1+'. CRISIL has also withdrawn its ratings on the Rs.1475 crore Lower Tier II Bonds (Under Basel II) and Rs 1000 crore Upper Tier II Bonds (Under Basel II) as these have been redeemed. Furthermore, the rated amount of the certificates of deposits has been reduced to Rs 20000 crore from Rs 50000 crore as the current outstanding balance in the programme is nil.

The ratings continue to reflect the bank's strong market position and adequate capitalization. The ratings also factor in a strong expectation of support from the Government of India (GoI), the majority stakeholder. The ratings also reflect the bank's weak asset quality and moderate earnings profile.

CRISIL's rating on the Tier I bonds (Under Basel III) of Canara is as per the revised criteria for these instruments (please refer to 'CRISIL's rating criteria for BASEL III-compliant instruments of banks'). The revision in criteria follows the change in RBI guidelines broadening the eligible pool of reserves for making coupon payments on these bonds.

Under the revised 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 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. Canara Bank's eligible reserves to total assets was average at around 1.65% as of March 2017, with CET1 capital buffer of at 2.17% as on March 31, 2017 (CET1 ratio of 8.92% compared to the regulatory minimum of 6.75%).

Analytical Approach

For arriving at the ratings, CRISIL has considered the standalone business and financial risk profiles of Canara Bank and has also factored in the support that the bank is expected to receive from its majority shareholder, Government of India (GoI).

Key Rating Drivers & Detailed Description
Strengths
* Strong expectation of support from GoI
GoI is 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 the government, 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. CRISIL believes the majority ownership creates a moral obligation on the government to support PSBs, including Canara Bank. As part of the Indradhanush framework, the government has pledged to infuse at least Rs 70,000 crore in PSBs between 2015 and 2019, of which Rs 25,000 crore was infused in fiscal 2016 and Rs 16,410 crore in fiscal 2017. The government 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 4.11 % and 4.12%, respectively, in deposits and advances as on June 30, 2017. The bank also has a pan-India branch presence, with around 6097 branches and 10559 automated teller machines across the country as on the same date. 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 33,865 crore as June 30, 2017. Its Tier I CAR and overall CAR stood at 9.57% and 12.61%, respectively, as on June 30, 2017 (8.83% and 12.11% as on June 30, 2016). The net worth coverage for net NPAs stood at around 1.6 times as on March 31, 2017 (1.5 times as on March 31, 2016), which remains higher than the industry average. The GOI infused Rs 743 crores as equity capital in the bank in fiscal 2017.

Weaknesses
* Average asset quality
Canara Bank's asset quality is average as reflected by its gross non-performing assets (NPAs) of 10.56% as on June 30, 2017 (9.71% as on June 30, 2016). Slippages remained high for the bank in the past few quarters, 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. CRISIL expects pressure on asset quality to persist in fiscal 2018. However, the bank is focusing on recoveries in the near to medium term which is expected to aid the asset quality.

* Moderate earnings profile
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 remained low at 1.7% for fiscal 2017 mainly due to decline in its interest bearing assets. CRISIL expects the margins to stabilize at current levels as the pressure on yields would largely be negated by further softening of cost of borrowing. Canara Bank's credit cost declined to around 1.3% in fiscal 2017 from 1.7% in fiscal 2016. CRISIL expects the credit cost to remain at similar levels for the current fiscal. Canara Bank's provisioning coverage ratio increased from 33.6% as on June 30, 2016 to 35.5% as on June 30, 2017, however it remains lower than industry average. Its low provisioning coverage ratio makes its earnings susceptible to rise in provisioning costs. 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: Negative

CRISIL believes that Canara Bank's credit risk profile will continue to derive significant strength from GoI's ownership and strong market position, however, asset quality and profitability will remain under pressure over the medium term. The ratings may be downgraded in case of sharper-than-expected deterioration in asset quality or profitability. Conversely, the outlook may be revised to 'Stable' in case of sustained improvement in asset quality and earnings profile.

About the Bank

Canara Bank is the fifth largest public sector bank by assets and has a pan-India presence, with a network of 6097 branches as on June 30, 2017. 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 7% of the total advances with operations spread across eight countries. Canara Bank reported a PAT of Rs 1122 crore on total income (net of interest expense) of Rs 17,426 crore for fiscal 2017, as against a loss of Rs 2813 crore and Rs 14,638 crore, respectively, for fiscal 2016. For the quarter ended June 30, 2017, the bank reported a PAT of Rs 252 crore.

Key Financial Indicators
Particulars Unit 2017 2016
Total Assets Rs. Cr.  5,79,875    5,39,767  
Total income Rs. Cr. 12,304  11,786 
Profit after tax Rs. Cr.   252 229 
Gross NPA % 10.6  9.7 
Overall capital adequacy ratio % 12.6 12.1
Return on assets % 0.18 0.17

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.
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 honour 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)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs.cr) Rating assigned with outlook
INE476A08068 BASEL III COMPLIANT ADDITIONAL TIER I 13-Dec-16 8.60% NA (Perpetual) 1000 CRISIL AA/Negative
NA BASEL III COMPLIANT ADDITIONAL TIER I^ NA NA NA 1500 CRISIL AA/Negative
INE476A09181 Lower Tier II SERIES XI 09-Jan-08 9.00% 09-Jan-18 700 CRISIL AAA/Negative
INE476A09199 Lower Tier II SERIES XII 16-Jan-09 8.08% 16-Jan-19 325 CRISIL AAA/Negative
INE476A09264 BASEL III TIER II Bonds 2015-16 (Series I) 31-Dec-15 8.40% 31-Dec-25 1500 CRISIL AAA/Negative
INE476A08043 BASEL III TIER II Bonds 2015-16 (Series II) 07-Jan-16 8.40% 07-Jan-26 900 CRISIL AAA/Negative
INE476A08050 BASEL III COMPLIANT TIER II Bonds 2016-17 27-Apr-16 8.40% 27-Apr-26 3000 CRISIL AAA/Negative
INE476A09249 BASEL III TIER II SER I 03-Jan-14 9.73% 03-Jan-24 1500 CRISIL AAA/Negative
INE476A09256 BASEL III TIER II SER II 27-Mar-14 9.70% 27-Mar-24 1000 CRISIL AAA/Negative
INE476A09231 Upper Tier II Bonds Series III 29-Sep-10 8.62% 29-Sep-25 1000 CRISIL AAA/Negative
INE476A09207 PERPETUAL -TIER1(SERIES I) 30-Mar-09 9.00% NA (Perpetual) 240.3 CRISIL AAA/Negative
INE476A09215 PERPETUAL -TIER1(SERIES II) 21-Aug-09 9.10% NA (Perpetual) 600 CRISIL AAA/Negative
INE476A09223 PERPETUAL -TIER1(SERIES III) 03-Aug-10 9.05% NA (Perpetual) 749.3 CRISIL AAA/Negative
NA Certificate of Deposit NA NA 7-365 days 20000 CRISIL A1+
^Yet to be issued
Annexure - Rating History for last 3 Years
  Current 2017 (History) 2016  2015  2014  Start of 2014
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Certificate of Deposits  ST  20000  CRISIL A1+    No Rating Change    No Rating Change    No Rating Change    No Rating Change  CRISIL A1+ 
Lower Tier-II Bonds (under Basel II)  LT  1025  CRISIL AAA/Negative    No Rating Change  10-03-16  CRISIL AAA/Negative    No Rating Change     No Rating Change   CRISIL AAA/Stable  
Perpetual Tier-I Bonds (under Basel II)  LT  1589.6  CRISIL AAA/Negative    No Rating Change  10-03-16  CRISIL AAA/Negative    No Rating Change    No Rating Change  CRISIL AAA/Stable  
Tier I Bonds (Under Basel III)  LT  2500  CRISIL AA/Negative    No Rating Change  04-11-16  CRISIL AA/Negative    --    --  -- 
Tier II Bonds (Under Basel III)  LT  7900  CRISIL AAA/Negative    No Rating Change  10-03-16  CRISIL AAA/Negative    No Rating Change    No Rating Change  CRISIL AAA/Stable 
Upper Tier-II Bonds (under Basel II)  LT  1000  CRISIL AAA/Negative    No Rating Change  10-03-16  CRISIL AAA/Negative    No Rating Change     No Rating Change   CRISIL AAA/Stable  
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
Rating Criteria for Banks and Financial Institutions
Criteria for Notching up Stand Alone Ratings of Entities Based on Government Support
Rating criteria for Basel III - compliant non-equity capital instruments

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