Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL A+/CRISIL A-/FAA/Stable/CRISIL A1+' ratings on the debt instruments of IDBI Bank Limited (IDBI Bank). CRISIL Ratings has also withdrawn its rating on the Rs 1834.4 crores of debt instruments as these have been redeemed. The withdrawal is line in with CRISIL policy on withdrawing the ratings.

 

The rating continues to factor in expectation of strong support from Life Insurance Corporation of India (LIC) and Government of India (GoI), both on an ongoing basis and in the event of distress. The ratings also factor in the Bank's established market position, supported by a large asset base. These rating strengths are partially offset by weak, albeit improving, asset quality and modest earnings profile.

 

LIC had, on January 21, 2019, completed acquisition of 51% controlling stake in IDBI Bank, infusing total capital of Rs 21,624 crore in the Bank. Post the acquisition, GoI stake stood at 47.11%. Given that LIC is a 100% GoI-owned entity and has supported the GoI in its recapitalisation programmes for public sector banks in the past, CRISIL Ratings believes that GoI will continue to be involved in matters relating to IDBI Bank. The bank raised capital to the extent of Rs 1435 crores in Q3 FY2021, in which LIC or GoI did not participate. However, even post the same, the shareholding of LIC and GOI continues to remain above 90%. As on December 31, 2021, the stake of LIC is 49.24% and that of Government of India is 45.48%. CRISIL Ratings also notes that the RBI approval to LIC at time of initial equity infusion in November 2018 also required LIC to ensure that IDBI Bank was adequately capitalized to meet minimum capital requirements stipulated by the RBI for a period of at least five years with a view towards enabling IDBI Bank to move out of the prompt corrective action (PCA) framework. While the Bank has come out of the PCA framework, LIC may still be required to support capital requirements in case of any exigency.

 

During the previous Union Budgets, the Finance Minister had announced GoI’s intention to sell its balance stake in IDBI Bank. However, CRISIL Ratings notes that the formal details for the stake sale transaction are yet to be announced. CRISIL Ratings will await this announcement, clarity on the modalities and timelines and details of the prospective investors. Hence, the stance and role of both GoI and LIC in the Bank, post stake sale by GoI, will also be a critical aspect to be evaluated. CRISIL Ratings notes that the RBI in its initial approval letter to LIC in November 2018 had stipulated that either IDBI Bank or LIC Housing Finance Limited, both being associates of LIC, have to cease conducting housing finance business within a period of five years. CRISIL Ratings will continue to closely monitor both these developments and its impact on the outstanding ratings of the Bank and take appropriate need-based rating action thereafter.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has factored in the support that the bank is expected to receive from GoI. Post completion of majority stake by LIC, its shareholding had increased to 51.0% and GoI's holding had come down to below 50%. Even post a subsequent capital raise, GoI and LIC together continue to hold over 90% stake in the bank. LIC is a 100% GoI owned entity and has supported the GoI in its recapitalisation programmes for public sector banks (PSBs) in the past. Even in fiscal 2018, LIC had infused Rs 394 crore in IDBI Bank, while GoI infused Rs 12,471 crore. In September 2019, the Bank received capital infusion of Rs 9,300 crore by LIC and GoI which helped it improve the capital ratios and bring it back above the regulatory requirement. As on December 31, 2021 the stake of LIC is 49.24% and that of Government of India is 45.48%. Hence, CRISIL Ratings believes that even if LIC is the majority shareholder, GoI will continue to be involved in matters relating to IDBI Bank. 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 banks with high GoI holding, and the severe implications of any failure in terms of political fallout, systemic stability, and investor confidence.

Key Rating Drivers & Detailed Description

Strengths:

* Strong expectation of support from GoI

The rating factors in an expectation of strong support from LIC and GoI, both on an ongoing basis and in the event of distress. LIC had, on January 21, 2019, completed acquisition of 51% controlling stake in IDBI Bank, infusing total capital of Rs 21624 crore in the bank. In September 2019, the Bank further received capital infusion of Rs 9,300 crore by LIC and GoI which helped it improve the capital ratios and bring it back above the regulatory requirement. Post the acquisition, GoI stake stood at 47.11%. The bank last raised capital in Q3 of fiscal 2021 of around Rs 1435 crores in which LIC/GoI did not participate. As on December 31, 2021, the stake of LIC stood at 49.24% and that of Government of India stood at 45.48%. Despite the same, the combined shareholding between LIC and GOI continues to remain above 90%. Given that LIC is a 100% GoI-owned entity and has supported the GoI in its recapitalisation programmes for public sector banks in the past, CRISIL Ratings believes that GoI will continue to be involved in matters relating to IDBI Bank. 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 banks with high GoI holding, and the severe implications of any failure in terms of political fallout, systemic stability, and investor confidence.

 

During the previous Union Budgets, the Finance Minister had announced that GoI proposes to sell its balance stake in IDBI Bank to private, retail and institutional investors through the stock exchange. However, CRISIL Ratings notes that the formal details for the stake sale transaction are yet to be announced. CRISIL Ratings will await this announcement, clarity on the modalities and timelines and details of the prospective investors. Hence, the stance and role of both GoI and LIC in the Bank, post stake sale by GoI, will also be a critical aspect to be evaluated. CRISIL Ratings will continue to closely monitor the developments and its impact on the outstanding ratings of the Bank and take appropriate need-based rating action thereafter.

 

* Stable deposit profile

The bank has a stable deposit profile marked by high CASA ratio and low average cost of deposits. As on December 31, 2021, the overall deposit base stood at Rs 222,578 crores. as on December 31, 2021, as against Rs 230,898 crores as on March 31, 2021. However, the decline of 3.6% is primarily due to a focused reduction in reliance on bulk deposits. Excluding the same, retail deposits and CASA registered an increase of 2.9% during the same period.  The share of CASA deposits continues to remain high increasing to 54.7% as on December 31, 2021, as compared to 50.5% as on March 31, 2021 (47.7% as on March 31, 2020). The cost of deposits too for the bank has been on a declining trend partly attributable to the shift from bulk deposits to retail and CASA deposits over the years. The average cost of deposits improved to 3.6% for 9 months of fiscal 2022 as against 4.3% for fiscal 2021 (5.1% for fiscal 2020).

 

* Established market position, supported by a large asset base

The bank had an asset base of Rs 291,249 crore as on December 31, 2021. Gross Advances of Rs 167,317 crore accounted for around 1.0-1.5% of the banking system advances. While the overall gross advances have been de-growing over the past few quarters, it is still among one of the large banks in India. Within the advances book, bank has reduced its corporate book exposure and increased its share of retail advances. As on December 31, 2021, share of retail book (comprising of retail assets, agriculture and MSME) stood at 63% compared to 56% as on March 31, 2020 (51% as on March 31, 2019). Within retail assets, around 74% comprises of home-loans as on December 31, 2021.

 

Weakness:

* Weak asset quality metrics; expected to improve going forward

Over the past five years, the bank had faced multitude of challenges which started with a spike in GNPA. reaching 21.3% as on March 31, 2017, from 5.9% as on March 31, 2015. The GNPA metrics peaked at 27.9% as on March 31, 2018. Since then, the bank has been working on cleaning up its balance sheet and recognizing as well as providing for the GNPAs adequately. While the reported GNPAs continue to remain elevated at 20.6% as on December 31, 2021 (22.4% as on March 31, 2021), the incremental slippages and stress in the book is limited. Slippages have been subdued over the last two years. Slippage ratio was at 1.9% for fiscal 2021 and 2.8% for nine months of fiscal 2022. In comparison, the slippage ratio for fiscal 2019 and fiscal 2020 was at 10.6% and 6.4% respectively.

 

The overall restructured book stood at 3.1% of gross advances as on December 31, 2021. The total SMA 1 and 2 accounts for the bank stood at Rs 2403 crore as on December 31, 2021, around 1.4% of the total gross advances. This has reduced from Rs 4087 crore (2.5% of total gross advances) as on March 31, 2021.

 

CRISIL Ratings notes that ~91% of the GNPA has 100% provision. Consequently, resolution of these accounts under NCLT process or transfer of these accounts post operationalization of the newly created National Asset Reconstruction Company Ltd may see a sharp drop in reported GNPAs. Overall, the ability of the bank to control slippages as the Bank restarts corporate lending remains a key monitorable going forward.

 

* Moderate earnings profile

The earnings profile has been marked by net losses over the past five years as the bank significantly ramped up provisioning for GNPAs. The Bank reported profit after tax in fiscal 2021 and also for the nine months ended December 31, 2021. But the profitability has been partly supported by recovery from written off accounts and tax refunds.

 

Additionally, over the last few years, the Bank had reported de-growth in advances (as it remained under PCA framework) while deposits steadily increased. Consequently the net advances to deposit ratio of the Bank had been on a declining trend. It stood at 56% as on March 2021 as compared to 69% as on March 2018. This kept net interest margins (NIMs) subdued.

 

However, over the last 18 months, the core operating profitability is now an improving trend on the back of lower cost of funds and improving yield as the share of retail book increases. Coupled with steady recovery from written-off accounts, the NIMs (including other income) has improved. NIM increased from 2.6% in fiscal 2020 to 3.4% in fiscal 2021 and further to 3.7% for the nine months of fiscal 2022.

 

In terms of credit costs, CRISIL Ratings believes that incremental provisions are likely to be lower for the bank as slippages have reduced significantly. For legacy GNPAs, the bank has substantially ramped up on its provision coverage ratio taking the same to almost 97% as on December 31, 2021. Even for the accounts admitted under NCLT, the bank has provided in full for the accounts admitted under the RBIs NCLT 1 and 2 list and for the other cases. With expectations of some recoveries on accounts admitted under NCLT, there could be write backs for the bank going forward which would support the earnings profile. Credit costs stood at around 0.6% for the nine months ended December 31, 2021 as against 1.4% for fiscal 2021, 6.6% for fiscal 2020 and 13.2% for fiscal 2019. CRISIL Ratings expects the earnings profile to improve going forward on the back of controlled credit costs. However, structural improvement in earnings will be linked to the ability to restart lending and improve credit to deposit ratio.

Liquidity: Strong

The liquidity coverage ratio of the bank stood at 144.13% as on December 31, 2021. The bank's liquidity also benefits from access to systemic sources of funds, such as the liquidity adjustment facility from RBI and access to the call money market

Outlook: Stable

CRISIL Ratings believes that IDBI Bank will continue to benefit from strong support from GoI and LIC.

Rating Sensitivity factors

Upward Factors

• Bank continuing to remain profitable on a sustainable basis
• Bank being able recover proceeds from written off assets through NCLT resolution process.

Downward Factors

• Any change in stance of support from GoI or LIC
• Deterioration in asset quality with Net NPA ratio rising above 6.0%

About the Company

Industrial Development Bank of India Ltd (IDBI) was constituted by GoI under the Industrial Development Bank of India Act, 1964, and was reconstituted as a banking company on October 1, 2004, to undertake commercial banking and development banking activities. The erstwhile IDBI Bank Ltd, IDBI’s subsidiary, was merged with IDBI in 2005. In 2006, IDBI acquired United Western Bank. In 2008, it got its present name.

 

In fiscal 2021, net profit was Rs 1359 crore and total income (net of interest expense) Rs 13143 crore. For the first nine months of fiscal 2021, the bank has reported profits at Rs 1749 crore and total income (net of interest expense) of Rs 10604 crore

Key Financial Indicators

As on/for the nine months/for the year ended	Unit	Dec 31, 2021	Mar 31, 2020	Mar 31, 2021
Total Assets	Rs crore	291249	299942	297764
Total income	Rs crore	17558	25295	24501
Profit after tax	Rs crore	1749	-12887	1359
Gross NPA	%	20.56	27.53	22.37
Overall capital adequacy ratio	%	16.75	13.31	15.59
Return on assets (Annualised)	%	0.8	Negative	0.5

 

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, which may result in loss of principal to investors, and hence, to default on the instrument by the issuer. As per the Basel III guidelines, the PoNV trigger will be determined by RBI. CRISIL Ratings 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 risks associated with the PoNV feature have, nevertheless, been 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 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 it 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.

Any other information: Not applicable