Rating Rationale

Strengths:
* Strong expectation of support from GoI
The rating continues 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, 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 IDBI Bank.

On August 8, 2018, IDBI Bank Limited (IDBI Bank) filed with the stock exchanges that the Government of India (GoI) has conveyed its no-objection to reduction of its stake in the Bank to below 50%, relinquishment of management control and acquisition of controlling stake in the bank by Life Insurance Corporation of India (LIC) as Promoter through preferential issue/open offer of equity, subject to requisite regulatory approvals and compliance with laws. In Q2 fiscal 2019, LIC infused Rs 2098 crore in IDBI Bank, taking its stake to 14.90% as on September 30, 2018 from 7.98% as June 30, 2018 and has also started the process of tendering an open offer to minority shareholders; the open offer will run from December 3,, 2018 to December 14, 2018. Post the open offer, a preferential allotment is likely to be made to LIC to take the stake to 51%. While the proposed stake acquisition is subject to resolution of the pending litigation, CRISIL believes that even once finalized, the acquisition of majority stake by LIC does not impact the expectation of support from GoI for IDBI Bank. This is because LIC is a 100% GoI-owned entity and has supported the GoI in its recapitalisation programmes for public sector banks in the past. Even if LIC were to be the majority shareholder, CRISIL believes that GoI will continue to be involved in matters relating to IDBI Bank. However, in this case, CRISIL will 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 326,018 crore as on September 30, 2018. Advances of Rs 157,793 crore accounted for around 1.8% 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.

Weaknesses
* Weak capitalisation ratios
The banks capitalization remains weak with CET 1, Tier 1 and overall CAR of 3.87%, 4.22% and 6.22%, respectively, as on September 30, 2018. These ratios remain below the regulatory requirement of 5.50%, 7.00% and 9.00%.The capital position of the bank has remained weak on account of high provisioning requirement which in turn, resulted in higher and continued losses. However, if the LIC-IDBI deal were to go through, it would result in a capital infusion of around Rs 17,500- Rs 20,500 crore in the bank, resulting in a significant improvement in the capital ratios of the bank.

* Weak asset quality; continued pressure expected
Asset quality has continued to deteriorate sharply over the past few quarters as reflected in the steep increase in gross NPAs to 31.78% as on September 30, 2018 (27.95% as on March 31, 2018), from 21.25% as on March 31, 2017. 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 15.1% (annualised) in the first half of fiscal 2019 (20.1% in fiscal 2018 and 12.8% in fiscal 2016.) 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 6012 crore and negative 3.6%, respectively, for the first half of fiscal 2019 (Rs 8238 crore and a negative 1.6%, respectively, for fiscal 2018). The net interest margin (NIM*; net interest income to average total assets) improved to 1.74% for the first half of fiscal 2019 as against 1.58% for fiscal 2018 due to the impact of interest reversal on the NIM being offset by the decline in cost of deposits (5.4% in the first half of fiscal 2019); however, it still remains low.

However, provisioning costs continue to remain high at 7.0% for the first half of fiscal 2019 (5.8% in fiscal 2018), 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) remained average at 55% as on September 30, 2018. However, the PCR on cases admitted in NCLT of Rs.31850 crore was higher at 81%. Ability to contain further deterioration in asset quality and thereby return to profitability and manage earnings remains a key sensitivity factor.

Outlook: Stable (for all instruments except hybrid instruments under Basel II)
CRISIL believes that IDBI Bank will continue to benefit from strong support from GoI, or LIC if the deal were to fructify. The bank's asset quality and earnings profile are however, expected to remain under pressure over the medium term.

Upside Scenario:
* The outlook may be revised to 'Positive' if there is a significant and sustained improvement in profitability and asset quality.

Downside Scenario:
* The outlook may be revised to 'Negative' in case of further significant deterioration in its asset quality or earnings profile.