Rating Rationale
September 01, 2020 | Mumbai
Central Bank Of India
 Ratings Reaffirmed
 
Rating Action
Rs.2000 Crore Tier II Bonds (Under Basel III) CRISIL A+/Stable (Reaffirmed)
Rs.2000 Crore Tier II Bonds (Under Basel III) CRISIL A+/Stable (Reaffirmed)
Lower Tier-II Bonds (Under Basel II) Aggregating Rs.1600 Crore CRISIL A+/Stable (Reaffirmed)
Rs.139.1 Crore Perpetual Tier-I Bonds (Under Basel II) CRISIL A/Stable (Reaffirmed)
Upper Tier-II Bonds (Under Basel II) Aggregating Rs.600 Crore CRISIL A/Stable (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A+/CRISIL A/Stable' ratings on the long-term debt instruments of Central Bank of India (Central Bank).
 
The ratings continue to reflect the expectation of strong support from the majority owner, Government of India (GoI), and the bank's adequate resource profile. These strengths are partially offset by weak asset quality and earnings.

The nationwide lockdown to contain the spread of the Covid-19 pandemic has impacted disbursements and collections of financial institutions. The lockdown has been eased in a phased manner. However, certain states have implemented local lockdowns. Any delay in return to normalcy will put further pressure on the collections and asset quality metrics of financial institutions.

Central Bank has provided moratorium to its borrowers, in line with the relief measure provided by the Reserve Bank of India (RBI), on an opt-out basis for both moratorium periods. As of August'20, around 20.37% of the term loan book by size and around 20.53% by customer count was under moratorium. Term loans account for around 52% of total advances. Any change in the payment discipline of borrowers will affect asset quality post the moratorium. Also, while the one-time restructuring scheme announced by RBI will provide the necessary support to affected borrowers in the current environment, details and operational implementation of the same remain to be seen.

Analytical Approach

For arriving at the ratings, CRISIL has taken a standalone view of the business and financial risk profiles of Central Bank. CRISIL has also factored in the expected strong support from GoI, both on an ongoing basis and in the event of distress.

Key Rating Drivers & Detailed Description
Strengths:
* Expectation of strong support from GoI:
GoI is the majority shareholder in all public sector banks (PSBs) and the guardian of India's financial sector. Stability of the banking sector is of prime importance to GoI, considering its criticality to the economy, the strong public perception of sovereign backing for PSBs and adverse implications of any PSB failure, in terms of a political fallout, systemic stability and investor confidence. The majority ownership creates a moral obligation on GoI to support PSBs, including Central Bank.
 
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 each 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, of which Rs 70,000 crore was allocated in fiscal 2020. Central Bank received Rs 15,103 crore through fiscals 2018-20.
 
* Adequate resource profile:
The bank operates on a large scale and has an adequate resource profile. It has pan-India presence, supported by 4,649 branches (around 63% of the branches are in rural and semi-urban areas) as on June 30, 2020, geographic diversity in deposits and adequate low-cost current account and savings account (CASA) deposits. CASA deposits, at 47% of total deposits as on June 30, 2020 (45% as on June 30, 2019), were better than that of peers.
 
Gross advances grew by 6.9% to Rs 176,496 crore, while deposits grew by 7.9% to Rs 321,252 crore, as on June 30, 2020. Total assets were Rs 363,687 crore.
 
Weaknesses:
* Weak asset quality
Overall gross non-performing assets (GNPAs), although declined, remain high at 18.1% as on June 30, 2020, and 18.9% as on March 31, 2020 (19.3% as on March 31, 2019). Large corporate NPAs account for 62% of overall GNPAs. Retail; micro, small, and medium enterprise (MSME); and agriculture sectors had GNPAs of 4.3%, 17.5% and 14.6%, respectively, as on June 30, 2020. However, slippages have declined over the past few fiscals to 5.6% of opening net advances in fiscal 2020, from 6.6% and 12.2% of opening net advances in fiscal 2019 and fiscal 2018, respectively. With standstill on asset classification, slippages were negligible in the first quarter of fiscal 2021. Asset quality may remain under pressure because of the pandemic and possible slowdown in recoveries in the medium term.
 
* Weak earnings profile
Earnings have been negatively impacted due to weak asset quality and high provisioning cost. However, net loss was Rs 1,121 crore in fiscal 2020 (return on assets was negative 0.3%), down from Rs 5,641 crore (return on assets was negative 1.7%) in fiscal 2019, driven by reduction in credit cost (1.5%, as against 3.4%), higher other income and marginal improvement in net interest margin. In the quarter ended June 30, 2020, Central Bank reported net profit of Rs 135 crore (return on assets: 0.1%) supported by lower provisions (annualised credit cost: 1.1%) and treasury profits. Provisioning coverage ratio (excluding technical write-off) increased to 67.2% as on June 30, 2020, from 65.2% a year earlier. The bank's ability to limit decline in asset quality, provisioning cost, and impact on profitability will remain key monitorable over the medium term.
Liquidity Strong

Liquidity is supported by sizeable retail deposits, which form a significant part of total deposits. Liquidity coverage ratio was 376.7% as on June 30, 2020, against the regulatory requirement of 80%, and the excess statutory liquidity ratio was 18.8% (Rs 59,403 crore). The bank also has access to systemic sources of funds, including the liquidity adjustment facility from RBI, call money market, and refinance limit from entities such as National Housing Bank and National Bank for Agriculture and Rural Development.

Outlook: Stable

Central Bank's credit risk profile derives significant strength from the strong support expected from GoI both on an ongoing basis and in the event of distress. The bank's asset quality and profitability though will remain under pressure over the medium term.

Rating Sensitivity factors
Upward factors
* Substantial and stable improvement in asset quality
* Improvement in profitability, leading to positive return on assets (above 0.1%) on a steady-state basis
 
Downward factors
* Material change in expectation of support from GoI
* Decline in the capital adequacy ratio (CAR) below minimum regulatory requirements (including Capital conservation buffer, which is tier I of 9.5% and overall CAR of 11.5%)
About the Bank

Nationalised in 1969, Central Bank was wholly owned by GoI until July 2007. After an initial public offering, GoI's stake declined and stands at 92.4% as on June 30, 2020. Total advances and deposits were Rs 176,496 crore and Rs 321,252 crore, respectively, as on June 30, 2020. The bank has a wide network of 4,649 branches.
 
For fiscal 2020, net loss was Rs 1,121 crore on total income (net of interest expense) of Rs 11,265 crore, against Rs 5,641 crore and Rs 9,185 crore, respectively, in the fiscal 2019.
 
For the quarter ended June 30, 2020, profit after tax was Rs 135 crore on total income (net of interest expense) of Rs 2,855 crore, against Rs 118 crore and Rs 2,570 crore, respectively, for the corresponding period of the previous fiscal.

Key Financial Indicators
As on / for the quarter ended June 30   2020 2019
Total assets Rs crore 363687 330047
Total income Rs crore 6726 6494
PAT Rs crore 135 118
GNPA % 18.10 19.93
Overall CAR % 11.5 9.6
Return on assets % 0.1 0.1

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
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 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.
 
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity
date
Issue size
(Rs crore)
Complexity levels Rating outstanding
with outlook
INE483A09245 Lower tier II bonds
(under Basel II)
 21-Dec-11 9.33 21-Dec-26 500.00 Complex CRISIL A+/Stable
NA Lower tier II bonds*
(under Basel II)
NA NA NA 1100.00 Complex CRISIL A+/Stable
INE483A08015 Upper tier II bonds
(under Basel II)
21-Jan-11 9.2 21-Jan-26 300.00 Highly Complex CRISIL A/Stable
INE483A09260 Tier II bonds
(under Basel III)
8-Nov-13 9.9 8-Nov-23 1000.00 Complex CRISIL A+/Stable
INE483A09278 Tier II bonds
(under Basel III)
 7-March-17 8.62 7-May-27 500.00 Complex CRISIL A+/Stable
INE483A09286 Tier II bonds
(under Basel III)
29-March-19 10.80 29-May-29 500.00 Complex CRISIL A+/Stable
INE483A09252 Tier I perpetual bonds
(under Basel II)
28-Sep-12 9.4 Perpetual 139.10 Highly Complex CRISIL A/Stable
NA Tier II bonds*
(under Basel III)
NA NA NA 2000.00 Complex CRISIL A+/Stable
*Not yet issued
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Certificate of Deposits  ST    --    --    --    --  12-09-17  Withdrawal  CRISIL A1+ 
                    30-03-17  CRISIL A1+   
Lower Tier-II Bonds (under Basel II)  LT  500.00
01-09-20 
CRISIL A+/Stable      20-09-19  CRISIL A+/Stable  05-03-18  CRISIL A+/Stable  12-09-17  CRISIL A+/Negative  CRISIL AA-/Negative 
            20-03-19  CRISIL A+/Stable  25-01-18  CRISIL A+/Stable  30-03-17  CRISIL A+/Negative   
Perpetual Tier-I Bonds (under Basel II)  LT  139.10
01-09-20 
CRISIL A/Stable      20-09-19  CRISIL A/Stable  05-03-18  CRISIL A/Stable  12-09-17  CRISIL A/Negative  CRISIL A+/Negative 
            20-03-19  CRISIL A/Stable  25-01-18  CRISIL A/Stable  30-03-17  CRISIL A/Negative   
Tier II Bonds (Under Basel III)  LT  2000.00
01-09-20 
CRISIL A+/Stable      20-09-19  CRISIL A+/Stable  05-03-18  CRISIL A+/Stable  12-09-17  CRISIL A+/Negative  CRISIL AA-/Negative 
            20-03-19  CRISIL A+/Stable  25-01-18  CRISIL A+/Stable  30-03-17  CRISIL A+/Negative   
Upper Tier-II Bonds (under Basel II)  LT  300.00
01-09-20 
CRISIL A/Stable      20-09-19  CRISIL A/Stable  05-03-18  CRISIL A/Stable  12-09-17  CRISIL A/Negative  CRISIL A+/Negative 
            20-03-19  CRISIL A/Stable  25-01-18  CRISIL A/Stable  30-03-17  CRISIL A/Negative   
All amounts are in Rs.Cr.
Links to related criteria
Rating Criteria for Banks and Financial Institutions
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Entities Based on Government Support
Rating Criteria for Hybrid Capital instruments issued by banks under Basel II guidelines

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