Rating Rationale
August 30, 2018 | Mumbai
Corporation Bank
Rating outlook revised to 'Negative'; ratings reaffirmed 
Rating Action
Lower Tier-II Bonds (Under Basel II) Aggregating Rs.1200 Crore  CRISIL AA-/Negative (Outlook revised from 'Stable' and rating reaffirmed) 
Tier-I Perpetual Bonds (Under Basel II) Aggregating Rs.437.5 Crore CRISIL A+/Negative (Outlook revised from 'Stable' and rating reaffirmed) 
Upper Tier-II Bonds (Under Basel II) Aggregating Rs.1400 Crore CRISIL A+/Negative (Outlook revised from 'Stable' and rating reaffirmed) 
Fixed Deposit Programme FAA+/Negative (Outlook revised from 'Stable' and rating reaffirmed) 
Rs.1000 Crore Tier I Bonds (Under Basel III) CRISIL A-/Negative (Withdrawn)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its outlook on the Lower Tier II Bonds (under Basel II), Tier-I Perpetual Bonds (under Basel II), Upper Tier II Bonds (under Basel II) and on Fixed Deposit Programme of Corporation Bank to 'Negative' from 'Stable', while reaffirming the ratings at 'CRISIL AA-/CRISIL A+/FAA+'. The rating on the Tier I bonds (under Basel III) have been withdrawn as they have been redeemed by the bank. The withdrawal is in line with CRISIL's policy.

The revision in the outlook is primarily driven by the expectation of continued pressure on Corporation Bank's profitability metrics due to lower than average provision coverage ratio (PCR). As on March 31, 2018, the bank's CRISIL-adjusted PCR stood at 37%. While the PCR has increased to 39% as on June 30, 2018, it remains among the lowest in the banking industry. While net interest margins (NIMs; on average assets) have improved in the first quarter of fiscal 2019, this is also partly driven by the change in accounting policy for recovery from NCLT accounts. Nevertheless, NIMs are likely to be higher than in fiscal 2018 and benefit the bank's pre-provisioning operating profits. Despite this, profitability is expected to be weak given the large incremental provisioning requirement.
Further, as on June 30, 2018, the bank reported total capital adequacy ratio (CAR) of 8.46%, below the statutory minimum of 9% (excluding the capital conservation buffer of 1.875%). Net-worth coverage for net NPAs was also low at 0.8 times as on as on June 30, 2018. Government of India (GoI) has infused Rs 2555 crore of capital in July 2018, which has shored up the capital ratios; however, given the expected pressure on earnings, dependence on further capital infusion will remain high.
The ratings continue to factor in the expectation of strong support from majority owner, Government of India. Asset quality remains weak with gross non-performing assets (NPAs) at 17.44% as on June 30, 2018 (17.35% as on March 31, 2018 and 15.49% as on June 30, 2017). Slippages also remained high at 5.1% (annualized) in the first quarter of fiscal 2019. While asset quality will be aided by recovery from NCLT cases, the bank's ability to contain further slippages will be critical to manage asset quality.

Analytical Approach

The ratings on Corporation Bank's debt instruments continue to factor in the strong support expected from its majority owner, the GoI. 

Key Rating Drivers & Detailed Description
* Strong expectation of support from the GoI:
The ratings continue to factor in an 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 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, including for Corporation Bank and the severe implications of any PSB failure in terms of political fallout, systemic stability, and investor confidence in public sector institutions. CRISIL believes that the majority ownership creates a moral obligation on GoI to support the PSBs, including Corporation Bank. As part of the 'Indradhanush' framework, government has pledged to infuse at least Rs 70,000 crore in PSBs during fiscals 2015-19, of which Rs 25,000 crore each was infused in fiscals 2016 and 2017. Further, in October 2017, the government had outlined recapitalisation package of Rs 2.11 lakh crores over fiscals 2018 and 2019, out of which PSBs received Rs 88,139 crore from the government in fiscal 2018. Corporation Bank has received Rs 2,555 crore till date in the current fiscal. This helped correct the regulatory capital breach that occurred as on June 30, 2018.
* Weak asset quality and earnings profile
Corporation Bank's asset quality has deteriorated significantly over the past few quarters and is expected to remain under pressure in the near term. End June 2018, Corporation Bank's GNPA ratio stood at 17.44%, slightly up from 17.35% as on March 31, 2018 and 15.49% as on June 30, 2017. The gross NPA increase during fiscal 2018 primarily due to protracted high slippages in large corporate exposures coupled with base effect due to loan book contraction. In the first quarter of fiscal 2019, the slippage ratio (as a proportion of opening net advances) stood at 5.1%; this is high but lower compared to 10.4% is fiscal 2018. CRISIL believes recovery from NCLT accounts will help asset quality going ahead, but Corporation Bank's ability to contain further slippages will be a key monitorable.
Corporation Bank's weak asset quality has also impacted profitability. In fiscal 2018, the bank reported a loss of Rs 4,054 crore (Return on average assets of -1.73%). While the bank has reported a small profit of Rs 85 crore in the first quarter of fiscal 2019, this was due to tax benefits.  The CRISIL adjusted annualized NIM for three months ending June 30, 2018 stood at 3.0% (2.0% in fiscal 2018). The increase in NIM was partly due to change in accounting treatment wherein the recovery from NPAs is now first appropriated towards charges, interest income and then towards the principal amount. NIM also benefited from the lower cost of deposits in the current year. Other income constituting 33% of total revenues (net of interest income) grew by 14% Y-o-Y primarily driven by recovery in bad debts. However, overall profitability remained constrained due to a 30% increase in provision costs. Given the requirement for ageing provisions, profitability is expected to remain under pressure.
* Modest resource profile
Corporation Bank's resource profile remains modest. with current account and savings accounts (CASA)  deposits stood at 28.5% as on June 30, 2018 (from 29.5% as on March 30, 2018 and 24.3% as on June 30, 2017), it still remains among the lowest in the industry. Overall, the bank's CASA ratio has witnessed a decline from previous level. Corporation Bank is taking measures to improve the proportion of CASA deposits by rebalancing its deposit portfolio to reduce its dependence on high cost term deposits. The benefits of these measures will, however, be visible only over the medium term.

Outlook: Negative on Lower Tier II Bonds (under Basel II), Tier-I Perpetual Bonds (under Basel II), Upper Tier II Bonds (under Basel II) and on Fixed Deposit Programme
CRISIL believes that Corporation Bank will continue to benefit from strong support from GoI. The bank's profitability is however, expected to remain under pressure given the requirement of higher provisioning costs.
Upside scenario
* Pre-provisioning profits comfortably cover the provisioning requirement in fiscal 2019 and there is no further deterioration in asset quality.
Downside Scenario
* Higher-than-expected losses in fiscal 2019 and/or significant further deterioration in asset quality.
* Decline in capital ratios below statutory minimum

About the Company

Corporation Bank was established in 1906 in Udupi (Karnataka) by a group of merchants, educationists, lawyers and insurance agents. GoI owns 79.87% of the bank's equity share capital. The bank had 2440 branches.

For fiscal 2018 Corporation Bank reported a net loss of Rs 4054 crore on total income (net of interest expenses) of Rs 7,151 crore against net profit of Rs 561 crore on total income (net of interest expenses) of Rs 7541 crore end fiscal 2017.

For quarter ending June 30, 2018, the bank reported a profit of Rs 85 crore on total income (net of interest expenses) of Rs 2352 crore as against net profit of Rs 60 crore  on total income (net of interest expenses) of Rs 1727 crore for the corresponding quarter previous fiscal.

Key Financial Indicators
As on / for  the quarter ended June 30   2018 2017
Total Assets Rs crore 199,705 248,480
Total income (net of interest expenses) Rs crore 2,352 1,727
Profit after tax Rs crore 85 60
Gross NPA % 17.4 15.5
Overall capital adequacy ratio % 8.46 10.62
Return on assets (annualised) % 0.16 0.10

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 the Basel III guidelines, the PONV trigger will be determined by the Reserve Bank of India (RBI). CRISIL believes that the PONV trigger is a remote possibility in the Indian context, given the robust regulatory and supervisory framework and the 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; this is because debt servicing on hybrid instruments is far more sensitive to the bank's overall capital adequacy levels and profitability.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of
Rate (%)
Issue Size
(Rs Cr)
Rating Outstanding 
with Outlook
INE112A09026 LT II bonds under Basel II* 19-Mar-08 9.3 19-Mar-18 200 CRISIL AA-/Negative
INE112A09034 LT II bonds under Basel II* 27-Mar-08 9.4 27-Mar-18 300 CRISIL AA-/Negative
INE112A09042 LT II bonds under Basel II 3-Dec-08 10.8 3-Dec-18 200 CRISIL AA-/Negative
INE112A09083 LT II bonds under Basel II 31-Mar-09 8.85 31-May-19 500 CRISIL AA-/Negative
INE112A09067 Tier-I Perpetual Bonds (under Basel II) 19-Jan-09 9 Perpetual 237.5 CRISIL A+/Negative
INE112A09141 Tier-I Perpetual Bonds (under Basel II) 11-Aug-09 9.05 Perpetual 100 CRISIL A+/Negative
INE112A09158 Tier-I Perpetual Bonds (under Basel II) 16-Aug-09 9.1 Perpetual 100 CRISIL A+/Negative
INE112A09059 Upper Tier-II Bonds (under Basel II) 12-Dec-08 10.1 12-Dec-23 300 CRISIL A+/Negative
INE112A09125 Upper Tier-II Bonds (under Basel II) 10-Aug-09 8.45 10-Aug-24 250 CRISIL A+/Negative
INE112A09133 Upper Tier-II Bonds (under Basel II) 11-Aug-09 8.45 11-Aug-24 300 CRISIL A+/Negative
INE112A09166 Upper Tier-II Bonds (under Basel II) 29-Apr-10 8.75 29-Apr-25 550 CRISIL A+/Negative
NA Fixed Deposit Programme NA NA NA Programme FAA+/Negative
*Rated, utilized and redeemed.
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Certificate of Deposits  ST    --    --  04-04-17  Withdrawal  15-03-16  CRISIL A1+  02-04-15  CRISIL A1+  CRISIL A1+ 
                10-03-16  CRISIL A1+  06-02-15  CRISIL A1+   
Fixed Deposits  FD  0.00  FAA+/Negative  25-01-18  FAA+/Stable  31-08-17  FAA+/Negative  15-03-16  FAAA/Negative  02-04-15  FAAA/Stable  FAAA/Stable 
            08-06-17  FAAA/Negative  10-03-16  FAAA/Negative  06-02-15  FAAA/Stable   
            04-04-17  FAAA/Negative           
Lower Tier-II Bonds (under Basel II)  LT  1200.00
CRISIL AA-/Negative  25-01-18  CRISIL AA-/Stable  31-08-17  CRISIL AA-/Negative  15-03-16  CRISIL AA/Negative  02-04-15  CRISIL AA+/Stable  CRISIL AA+/Stable 
            08-06-17  CRISIL AA/Negative  10-03-16  CRISIL AA/Negative  06-02-15  CRISIL AA+/Stable   
            04-04-17  CRISIL AA/Negative           
Perpetual Tier-I Bonds (under Basel II)  LT  437.50
CRISIL A+/Negative  25-01-18  CRISIL A+/Stable  31-08-17  CRISIL A+/Negative  15-03-16  CRISIL AA-/Negative  02-04-15  CRISIL AA/Stable  CRISIL AA/Stable 
            08-06-17  CRISIL AA-/Negative  10-03-16  CRISIL AA-/Negative  06-02-15  CRISIL AA/Stable   
            04-04-17  CRISIL AA-/Negative           
Tier I Bonds (Under Basel III)  LT  1000.00
Withdrawal  25-01-18  CRISIL A-/Negative  31-08-17  CRISIL A-/Negative  15-03-16  CRISIL A/Negative  02-04-15  CRISIL AA-/Stable  CRISIL AA-/Stable 
            08-06-17  CRISIL A/Stable  10-03-16  CRISIL A/Negative  06-02-15  CRISIL AA-/Stable   
            04-04-17  CRISIL A/Negative           
Tier II Bonds (Under Basel III)  LT    --    --  08-06-17  Withdrawal  15-03-16  CRISIL AA/Negative  02-04-15  CRISIL AA+/Stable  -- 
            04-04-17  CRISIL AA/Negative  10-03-16  CRISIL AA/Negative  06-02-15  CRISIL AA+/Stable   
Upper Tier-II Bonds (under Basel II)  LT  1400.00
CRISIL A+/Negative  25-01-18  CRISIL A+/Stable  31-08-17  CRISIL A+/Negative  15-03-16  CRISIL AA-/Negative  02-04-15  CRISIL AA/Stable  CRISIL AA/Stable 
            08-06-17  CRISIL AA-/Negative  10-03-16  CRISIL AA-/Negative  06-02-15  CRISIL AA/Stable   
            04-04-17  CRISIL AA-/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
Rating criteria for Basel III - compliant non-equity capital instruments

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