Rating Rationale

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%. 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 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 PSBs, and the severe implications of any PSB failure in terms of political fallout, systemic stability, and investor confidence in public sector institutions.

CRISIL will, however, continue to monitor LIC's plans, likely over a 5-7 year period, to bring down its stake in IDBI Bank to below 51%

* Established market position, supported by a large asset base
The bank had an asset base of Rs 313,663 crore as on September 30, 2019. Advances of Rs 132,718 crore accounted for around 1.3% of the banking system advances. While the bank has 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 September 30, 2019, share of retail book stood at 53% compared to 46% as on September 30, 2018.

Weaknesses:
* Weak asset quality; continued pressure expected
Asset quality has continued to deteriorate over the past few quarters as reflected in the increase in gross NPAs to 29.4% as on September 30, 2019 (27.47% as on March 31, 2019), from 27.95% as on March 31, 2018. While the increase in the gross NPA ratio is partly on account of de-growth in advances, absolute quantum has also increased over this period. Slippages to NPAs (as a percentage of opening net advances) remained high, at around 9.1% (annualised) in the first half of fiscal 2020 (10.6% in fiscal 2019 and 20.1% in fiscal 2018). As on September 30, 2019, SMA 2 exposure stood at Rs.6295 crore compared to Rs.2865 crore as on June 30, 2019. However, the net NPA for the bank has reduced to 5.97% as on September 30, 2019 compared to 17.3% as on September 30, 2018 mainly on account additional provisions made by the bank. Containing deterioration in asset quality, and hence profitability, remains a key monitorable.

* Weak earnings profile
The sharp deterioration in asset quality has significantly impacted profitability. Net loss and return on assets (annualised) stood at Rs 7260 crore and negative 4.6%, respectively, for the first half of fiscal 2020 (Rs 15116 crore and a negative 4.5%, respectively, for fiscal 2019). The net interest margin (NIM*; net interest income to average total assets) improved to 2.0% for the first half of fiscal 2020 as against 1.7% for corresponding period of previous year due to the impact of interest reversal on the NIM being offset by the decline in cost of deposits (5.0% in the first half of fiscal 2020); however, it still remains low.

The pre provisioning profit (PPOP) for the bank improved to Rs 1031 crore during the quarter ended September 30, 2019 as compared Rs 883 crore during the quarter ended September 30, 2018. Provisioning costs continue to remain high at 7.6% for the first half of fiscal 2020 (8.0% in fiscal 2019), and are expected to remain high over the next few quarters, given continued slippages and increasing provisioning requirements on stressed assets. The provisioning coverage ratio (PCR; excluding technical write offs) for the bank improved to 85% as on September 30, 2019 compared to 55% as on September 30,2018. Ability to contain further deterioration in asset quality and thereby return to profitability and manage earnings remains a key sensitivity factor.