Rating Rationale

Strengths
* 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.

Weakness
* 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