| Central Bank of India | ||||||||
| Ratings Reaffirmed | ||||||||
| 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 A+/CRISIL A/Stable' ratings on the tier-II bonds (under Basel III), lower tier-II bonds (under Basel II), tier-I perpetual bonds, and upper tier-II bonds (hybrid instruments; under Basel II) of Central Bank of India (Central Bank). |
| Analytical Approach |
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For arriving at the ratings, CRISIL has considered the standalone business and financial risk profiles of Central Bank. CRISIL has also factored in the support that the bank is expected to receive from the Government of India (GoI). |
| Key Rating Drivers & Detailed Description |
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Strengths: * Strong expectation of support from the majority owner, GoI: The ratings continue to factor in the expectation of strong government support, both on an ongoing basis and in the event of distress. This is because GoI is both the majority shareholder in PSBs and the guardian of India's financial system. 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 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 GoI to support PSBs, including Central Bank. As part of the 'Indradhanush' framework, the government has 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. Furthermore, in October 2017, the government outlined a recapitalisation package of Rs 2.11 lakh crore over fiscals 2018 and 2019, of which, PSBs will receive Rs 88,139 crore in fiscal 2018. Central Bank has been allocated Rs 5158 crore for the fiscal. * Sizeable scale of operations, backed by extensive branch network: The bank operates on a large scale, and has an adequate resource profile. Being one of India's largest banks in terms of asset base, Central Bank has a pan-India presence, supported by 4715 branches as on December 31, 2017, geographical diversity in deposits, and adequate low-cost current account and savings account (CASA) deposits. CASA deposits, at 40.7% of total deposits, as on December 31, 2017 (39.2% as on March 31, 2017), were in line with the industry average. The bank has been reducing dependence on high-cost wholesale deposits to support growth in advances. Weaknesses * Weak asset quality Asset quality remains under stress, with gross non-performing assets (NPAs) at 18.1% as on December 31, 2017, against 14.14% for December 31, 2016 (17.8% as on March 31, 2017). In absolute terms, GNPAs increased to Rs 32,491 crore as on December 31, 2017, from Rs 27,251 crore as on March 31, 2017. Slippages to NPAs for the nine months of fiscal 2018 (annualised) remained high, at 9.3% of net advances (5.8% of net advances for fiscal 2017). Restructured standard assets dropped to 2.6% in the nine months ended December 31, 2017, from 4.9% in fiscal 2017. Asset quality is likely to remain weak over the medium term, given the large exposure to vulnerable sectors (infrastructure, construction, and iron and steel), amidst a weak commodity price cycle and inability of highly-leveraged corporate borrowers to reduce debt. * Weak earnings profile Earnings profile remains weak, marked by high provisioning cost and large operating expenses. The bank had a loss of Rs 2991 crore for the nine months ended December 31, 2017, while return on assets ratio was negative 1.25% (annualised). High credit cost in the past few quarters' impacted profitability. Provisioning expense stood at Rs 5177 crore for the nine months ended December 31, 2018 (Rs 5528 crore for fiscal 2017). Provisioning cost is likely to remain high over the next few quarters, given the higher provisioning requirement on certain accounts, and due to ageing of NPAs. Weak earnings have put pressure on the bank's capital position, as Tier 1 and overall CAR stood at 5.87% and 7.87%, respectively, as on September 30, 2017. Nevertheless, with the proposed capital infusion of Rs 5158 crore, the capital ratios are expected to improve. However, profitability is likely to remain under pressure over the medium term. |
| Outlook: Stable |
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CRISIL believes Central Bank will continue to benefit from strong support from GoI, especially given the recent announcement on recapitalisation. Asset quality and profitability, however, are expected to remain under pressure over the medium term. |
| About the Bank |
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Nationalised in 1969, Central Bank was wholly owned by GoI until July 2007. After an initial public offering, GoI's ownership declined and stands at 80.2% as on September 20, 2017. The bank had a network of 4715 branches as on that date. |
| 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 Tier-II Instruments (Under Basel III)
The distinguishing feature of Tier-II capital instruments under Basel II is the existence of the point of non-viability (PONV) trigger, the occurrence of which may result in loss of principal to the investors, and hence, to default on the instrument by the issuer. According to Basel III guidelines, the PONV trigger will be determined by the Reserve Bank of India (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) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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