Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL A1+’ rating to Rs.10,000 crore certificate of deposits of Central Bank of India (Central Bank) and has reaffirmed its ‘CRISIL AA-/CRISIL A+/Stable’ ratings on the existing debt instruments.
CRISIL Ratings has also withdrawn its rating on Rs.1,000 crore Tier II bonds (under Basel III) on the company's request as the outstanding against the same is nil and on receipt of confirmation from debenture trustee (See Annexure 'Details of rating withdrawn' for details). The withdrawal is in line with CRISIL Ratings withdrawal policy.
The rating continues to factor in expectation of strong support that the bank is expected to receive from its majority stakeholder - Government of India (GoI), and the adequate resource profile of the bank. These strengths are partially offset by the average, albeit improving, asset quality and earnings.
Capital position of the bank has improved, supported by internal accrual and timely equity infusion by the majority stakeholder, GoI. Between fiscals 2018 and 2021, the government infused Rs 19,903 crore, which led to a substantial improvement in the capital adequacy ratio (CAR). CAR remained healthy at 14.8% as on September 30, 2023. With continued profitability, the capital position should be adequate going forward.
In terms of profitability, the bank registered a return on assets (RoA) of 0.5%, on an annualised basis, for the first half of fiscal 2024, higher than 0.4% in fiscal 2023 and 0.3% in fiscal 2022. This improvement was driven by expansion in net interest margin (NIM) to 3.0% (annualised) in the first half of fiscal 2024, from 2.9% in fiscal 2023 (2.5% in fiscal 2022) on account of higher average yields. Credit cost stood at 0.9% (annualised) for H1FY24 as compared 1.1% in FY23 while operating expenses, as a percentage of managed assets, saw an uptick and stood at 2.3% (annualised) in H1FY24 compared to 2.2% and 1.9% in FY23 and FY22 respectively.
Asset quality improved significantly as gross non-performing assets (NPAs) fell sharply to 4.6% as on September 30, 2023, from 8.4% as on March 31, 2023, mainly supported by write-offs. Net NPAs also declined to 1.6% from 1.8% during the same periods. Slippages in the first half of fiscal 2024 stood at 2.0% (annualised), compared to 2.4% in fiscal 2023. As on September 30, 2023, restructured advances accounted for 2.7% of the portfolio (3.1% as on March 31, 2023). |
Analytical Approach For arriving at the ratings, CRISIL Ratings has considered the standalone business and financial risk profiles of Central Bank and has factored in the strong support that the bank is expected to receive from its majority owner, GoI, both on an ongoing basis and in the event of distress. |
Key Rating Drivers & Detailed Description Strengths:
As part of the Indradhanush framework, the government had pledged to infuse at least Rs 70,000 crore in PSBs from fiscals 2015 to 2019, of which Rs 25,000 crore per annum was infused in fiscals 2016 and 2017. In October 2017, the government outlined a recapitalisation package of Rs 2.11 lakh crore over fiscals 2018 and 2019, whereby Central Bank received Rs 5,158 crore in fiscal 2018 and Rs 6,592 crore in fiscal 2019. The GoI allocated an additional Rs 70,000 crore in fiscal 2020, of which the bank received Rs 3,353 crore. In fiscal 2021, GoI infused Rs 4,800 crore. Thus, over the past few fiscals, GoI has infused Rs 19,903 crore in Central Bank, helping improve its capital ratios. As on September 30, 2023, the Tier 1 and overall CAR stood at 12.1% and 14.8%, respectively.
Gross advances grew 15% to Rs 2,17,779 crore, while deposits grew 5% to Rs 3,59,296 crore in fiscal 2023. Cost of deposits for fiscal 2023 was 3.8%. In the first half of fiscal 2024, gross advances and deposits further grew to Rs 2,31,032 crore and Rs 3,71,252 crore, respectively, while cost of deposits increased to 4.4% (annualised).
Weakness:
Given that a large part of stress in the corporate book is now recognised, slippages in this segment should be lower than in the past. As on September 30, 2023, restructured advances stood at Rs 6,165 crore (2.7% of the bank portfolio). Asset quality will remain a key monitorable over the medium term.
Earnings, while moderate, have been improving with profit reported for ten consecutive quarters. PAT in fiscal 2023 and first half of fiscal 2024 stood at Rs 1,582 crore (RoA of 0.40%) and Rs 1,024 crore (annualised RoA of 0.5%) on the back of improved NIMs and recovery of written-off accounts. This is partially offset by higher operating and credit cost (due to contingency provisions of around Rs 1,500 crore set aside in the last quarter of fiscal 2023). Provision coverage ratio reduced to 66% as on September 30, 2023, from 80% as on March 31, 2023, due to high technical write-off being made in first half of fiscal 2024. Ability to manage credit cost and improve profitability will be closely monitored. |
Liquidity: Superior Liquidity is supported by sizeable retail deposits, forming a significant proportion of total deposits. Liquidity coverage ratio was 237% as on September 30, 2023, against the regulatory requirement of 100%. The bank also has access to systemic sources of funds, including the liquidity adjustment facility from the Reserve Bank of India, the call money market and refinance limits from the National Housing Bank and National Bank for Agriculture and Rural Development.
ESG profile CRISIL Ratings believes the environment, social and governance (ESG) profile of Central Bank supports its already strong credit risk profile.
The ESG profile for financial sector entities typically factors in governance as a key differentiator. The sector has a reasonable social impact because of its substantial employee and customer base and can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, the lending decisions may have a bearing on the environment.
Central Bank has an ongoing focus on strengthening the various aspects of its ESG profile.
Key highlights:
There is growing importance of ESG among investors and lenders. The commitment of Central Bank to ESG will play a key role in enhancing stakeholder confidence, given shareholding by foreign portfolio investors and access to domestic capital markets. |
Outlook: Stable CRISIL Ratings believes Central Bank will continue to benefit from government support, both on an ongoing basis as well as in the event of distress. |
Rating Sensitivity factors Upward factors:
Downward factors:
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About the Bank Nationalised in 1969, Central Bank was wholly owned by GoI until July 2007. After an initial public offering, the stake held by GoI came down to 93.08% as on September 30, 2023. The bank had total advances and deposits of Rs 2,31,032 crore and Rs 3,71,252 crore, respectively, and a network of 4,489 branches as on September 30, 2023.
For fiscal 2023, the bank reported net profit of Rs 1,582 crore on total income (net of interest expense) of Rs 15,771 crore, against Rs 1,045 crore and Rs 12,455 crore, respectively, in fiscal 2022. For the first half of fiscal 2024, the bank reported net profit of Rs 1,024 crore on total income (net of interest expense) of Rs 8,224 crore, against Rs 553 crore and Rs 6,631 crore, respectively for the corresponding period in the previous fiscal. |
Key Financial Indicators
*annualised |
Any other information Note on Tier II instruments (under Basel III) The distinguishing feature of Tier II capital instruments under Basel III is the existence of the point of non-viability (PONV) trigger, the occurrence of which may result in loss of principal to 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 RBI. CRISIL Ratings 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, as debt servicing on hybrid instruments is far more sensitive to the bank's overall capital adequacy level and profitability. |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Not yet issued
Annexure - Details of Rating Withdrawn
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Criteria Details
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