Detailed Rationale

CRISIL has assigned its 'CRISIL AAA/Stable' and 'CRISIL AA/Stable' ratings to the Rs 1,000 crore Tier II Bonds (under Basel III) and Rs 500 crore Tier I Bonds (under Basel III), respectively, of Indian Bank. CRISIL has reaffirmed its 'CRISIL AAA/CRISIL AA/Stable' ratings on the bank's existing long-term debt instruments.

 

CRISIL Ratings has withdrawn its 'CRISIL AAA/Stable' rating on Rs 1,000 crore Infrastructure bonds as the same were unutilised; Rs 500 crore Tier I Bonds (Under Basel III) and Rs 500 crore Upper Tier II Bonds (Under Basel II) as the same were redeemed and there is no outstanding amount against the same. The withdrawal is in line with the withdrawal policy of CRISIL.

 

On March 02, 2021 CRISIL Ratings had revised its outlook to ‘Stable’ from ‘Negative’ given better-than-expected performance of the bank during the current macro environment. The reported gross non-performing assets (NPAs) stood at 9.0% as on December 31, 2020. Excluding the benefit of Supreme Court stay on NPA recognition, the pro-forma gross NPAs stood at 10.4% compared with 11.4% as on March 31, 2020. While gross NPAs are expected to increase from current levels, they should remain lower than what earlier envisaged. Asset quality of the bank is also supported by various schemes launched by the Government of India (GoI) and Reserve Bank of India (RBI), such as ECGLS, which has benefitted the micro, small and medium enterprises segment. The one-time restructuring scheme is also expected to benefit reported NPA metrics. Indian Bank plans to restructure around 1.62% of its advances. 

 

Furthermore, profitability of the bank has also witnessed an improvement, with the bank reporting profit after tax (PAT) of Rs 1,295 crore for the nine months ended December 31, 2020, with annualised return on assets (RoA) of 0.3%. This is against substantial loss of Rs 4,643 crore in fiscal 2020.

 

The overall ratings continue to factor in expectation of strong support Indian Bank is likely to receive from its majority owner, GoI, and the sizeable scale of operations. It also factors in a healthy resource profile, with a high proportion of current and savings account (CASA) deposits and adequate capitalisation. The ‘CRISIL AA/Stable’ rating on Tier I bonds (under Basel III) factors in the adequacy of eligible reserve to service coupon of Indian Bank after adjusting for any medium-term impact of profitability on the reserve position of the bank in a stress scenario.

 

In line with RBI's measures for Covid-19 pandemic, Indian Bank had given moratorium to its borrowers. While the collection efficiency was impacted during the initial months of the moratorium, collections have inched up since then. However, the second wave of Covid-19 pandemic has resulted in intermittent lockdowns and localised restrictions. This could lead to some delays in collections in upcoming months due to impact on the underlying borrower cash flows. Further, any change in the behaviour of borrowers on payment discipline can affect delinquency levels. Hence, asset quality of the bank and the consequent impact on the earnings profile will continue to be closely monitored.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of Indian Bank and its subsidiaries and associates because of majority shareholding, business and financial linkages and shared brand. CRISIL Ratings has also factored in the strong support the bank is likely to receive from GoI on an ongoing basis and in case of distress.

 

Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Strong expectation of support from GoI

The rating continues to factor in expectation of strong government support. This is because GoI is the majority shareholder in public sector banks (PSBs) and the guardian of India's financial system. Stability of the banking sector is of prime importance to the government given its criticality to the economy, strong public perception of sovereign backing for PSBs and severe implications of any PSB failure in terms of political fallout, systemic stability and investor confidence. The majority ownership creates a moral obligation on GoI to support PSBs, including Indian Bank. Any material change in shareholding by GoI and/or privatisation of the bank in line with announcement by the Finance Minister in the recent budget for privatisation of two PSBs will be key rating sensitivity factors.

As part of the Indradhanush framework, GoI had pledged to infuse at least Rs 70,000 crore in PSBs over fiscals 2015-2019, of which Rs 25,000 crore each was infused in fiscals 2016 and 2017. In October 2017, the government outlined a recapitalisation package of Rs 2.11 lakh crore over fiscals 2018-2019; Indian Bank and eAllahabad Bank together received Rs 1,500 crore in fiscal 2018 and Rs 11,740 crore in fiscal 2019 under this package. Also, GoI allocated Rs 70,000 crore in fiscal 2020, of which Rs 4,687 crore was received. Thus, over the past three fiscals, GoI has infused around Rs 17,927 crore in the combined entity.

 

• Adequate capitalisation

Capitalisation of the bank is adequate, with Common Equity Tier-1 (CET 1) ratio, Tier-I capital adequacy ratio (CAR) and overall CAR at 10.4%, 11.2% and 14.1%, respectively, as on December 31, 2020 (10.2%, 10.4% and 13.3%, respectively, as on April 1, 2020). The bank has flexibility to raise additional equity from the market, with the GoI stake at 88.06% as on December 31, 2020. The bank has raised Rs 2,000 crore of Tier 1 bonds and Rs 2,000 crore of Tier II bonds in the current fiscal. It is also in the process of raising additional capital in the coming quarters. The capital level is also supported by regular infusion from GoI. Capitalisation of Indian Bank provides cushion against asset-side risks. Its net worth coverage for net NPAs was 4.3 times as on December 31, 2020 (2.4 times as on April 1, 2020).

 

• Healthy resource profile

Resource profile of Indian Bank has strengthened following its amalgamation with eAllahabad Bank, with the proportion of low-cost CASA deposits at 40.9% as on December 31, 2020. The proportion remains above the industry average, helping Indian Bank maintain its cost of deposits (CoD) at a manageable level. CoD was 4.6% over the nine months through fiscal 2021 (5.2% in fiscal 2020). Moreover, the proportion of highly stable retail deposits (retail term deposits and savings account deposits), at around 94.3% of total domestic deposits as on December 31, 2020, supports the resource profile.

 

Resource profile of the bank is also expected to benefit from the increased reach following its amalgamation with a wider and more sizeable domestic branch network comprising 6,003 branches and 5,428 automated teller machines (ATMs) as on December 31, 2020.

 

Weakness:

• Modest, albeit improving, asset quality

Asset quality of the bank, with reported and pro-forma gross NPAs of 9.0% and 10.4% as on December 31, 2020 (11.4% as on March 31, 2020), remains modest, albeit with an improving trend. Until fiscal 2020, slippages for the bank were high at Rs 18,369 crore (5.7% of opening net advances) and Rs 17,171 crore (5.6%), respectively, in fiscal 2019. This was on account of slippage in a few large corporate accounts. Slippages have been much lower for the nine months ended December 31, 2020, at Rs 1,116 crore (0.4%), supported by the Supreme Court stay on NPA recognition.

 

Gross NPAs from the corporate segment stood at 10.8%, followed by agriculture (10.7%), micro, small and medium enterprises (8.5%) and retail (3.2%). Furthermore, the bank restructured accounts worth around 0.2% of advances as on December 31, 2020, expected to increase to around 1.62%.

 

Asset quality of bank as well as performance of the restructured accounts and ability of the management to contain slippages to NPAs and improve recoveries will remain key monitorables in the near to medium term.

 

• Modest earnings profile

Profitability was constrained primarily by high provisioning. The amalgamated bank had reported net loss of Rs 4,643 crore (with a negative RoA of 0.8%) in fiscal 2020 against net loss of Rs 8,012 crore (with negative RoA of 1.6%) in fiscal 2019.

 

However, profitability of the bank improved in fiscal 2021, as reflected in profit of Rs 1,295 crore with annualised RoA of 0.3% over the nine months through fiscal 2020. This was driven by lower provisioning costs of Rs 6,737 crore (annualised: 1.5%) against Rs 13,609 crore (2.5%) in fiscal 2020. Nevertheless, PCR (excluding technical write-offs) on the pro-forma NPAs of the bank continues to remain high at around 69% as on December 31, 2020 (76% on reported NPAs).

 

Improvement and sustainability of profit will remain a key rating sensitivity factor. 

Liquidity: Superior

Liquidity is supported by a sizeable retail deposit base that forms a significant part of the total deposits. Liquidity coverage ratio was 168.7% as on December 31, 2020, and excess statutory liquidity was Rs 43,880 crore (8.3% of Net Demand and Time Liabilities) as on January 31, 2021. Liquidity also benefits from access to systemic sources of funds, such as the liquidity adjustment facility from the RBI, access to the call money market and refinance limits from sources such as National Housing Bank and National Bank for Agriculture and Rural Development.

Outlook: Stable

The 'Stable' outlook on the debt instruments reflects expectation of continued, strong government support, adequate capitalisation and healthy resource profile.

Rating Sensitivity factors

Downward factors

• Material change in shareholding and/or expectation of support from GoI
• Higher-than-expected weakening of asset quality because of increase in slippages, with gross NPAs crossing 13%, thereby impacting the earnings profile
• Decline in capital adequacy ratios below the minimum regulatory requirements (including CCB, which is Tier I of 9.5% and overall CAR of 11.5% with effect from October 01, 2021) for an extended period

About the Bank

Set up in 1907, Indian Bank is a medium-sized bank. In 2007, it made its initial public offering, resulting in dilution of ownership of GoI to 80%. GoI’s ownership stood at 88.06% as on December 31, 2020, following issuing of shares under amalgamation to the shareholders of Allahabad Bank.

 

Amalgamation of Allahabad Bank into Indian Bank was effective from April 1, 2020. Following the amalgamation, the merged entity enjoys the benefits of a larger balance sheet, optimised capital utilisation and wider geographic reach leading to deeper penetration. Indian Bank has a strong domestic branch network comprising 6,003 branches and 5,428 ATMs. Additionally, the bank has international presence through three overseas branches (one each in Singapore, Colombo and Jaffna) as on December 31, 2020.

 

As on December 31, 2020, gross advances stood at Rs 389,646 crore (Rs 368,664 crore as on April 1, 2020) and deposits at Rs 521,248 crore (Rs 488,549 crore as on April 1, 2020).

 

In fiscal 2020, the amalgamated bank reported loss of Rs 4,643 crore on total income (net of interest expense) of Rs 18,826 crore against Rs 8,012 crore and Rs 16,112 crore, respectively, for the previous fiscal.

 

For the nine months ended December 31, 2020, the bank reported PAT of Rs 1,295 crore on total income (net of interest expense) of Rs 16,667 crore.

Key Financial Indicators

As on/ for the period December 31,	Unit	2020	2019
Total Assets	Rs Crore	608390	549816
Total income (net of interest expenses)	Rs Crore	16667	14122
PAT	Rs Crore	1295	(2980)
Gross NPAs	%	9.0	12.7
Overall capital adequacy ratio	%	14.1	12.2
Return on assets (annualised)	%	0.3	(0.7)

 

Any other information:

Note on complexity levels of the rated instrument:

CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.

 

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, 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 RBI. CRISIL Ratings believes 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 such as 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 for 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.

 

Note on Tier I instruments (under Basel III):

The distinguishing features of non-equity Tier-I capital instruments (under Basel III) are the existence of coupon discretion at all times, high capital thresholds for likely coupon non-payment and principal write-down (on breach of a pre-specified trigger). These features increase the risk attributes of non-equity Tier-I instruments over those of Tier-II instruments under Basel III and capital instruments under Basel II. To factor in these risks, CRISIL Ratings notches down the rating on these instruments from the bank's corporate credit rating. The rating on the Tier-I Bonds (under Basel III) has, therefore, been lowered by one notch from the corporate credit rating of Indian Bank to 'CRISIL AA' in line with the criteria of CRISIL Ratings (refer to 'CRISIL's rating criteria for Basel III-compliant instruments of banks').

 

The factors that could trigger a default event for non-equity Tier-I capital instruments (under Basel III) resulting in non-payment of coupon include i) the bank exercising coupon discretion; ii) inadequacy of eligible reserve to honour coupon payment if the bank reports losses or low profits; or iii) the bank breaching the minimum regulatory CET I (including CCB) ratio. Moreover, given the additional risk attributes, the rating transition for non-equity Tier-I capital instruments (under Basel III) can potentially be higher than that for Tier-II instruments.

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating outstanding with outlook
NA	Bonds (Additional Tier I)*	N.A	N.A	N.A	500	Highly Complex	CRISIL AA/Stable
INE562A08016	Bonds (Basel III Compliant Tier II Bonds)	28-July-16	8.1	28-July-26	600	Complex	CRISIL AAA/Stable
INE562A08024	Bonds (Basel III Compliant Tier II Bonds)	30-oct-18	8.90	30-Oct-28	290	Complex	CRISIL AAA/Stable
INE562A08032		06-Nov-18	8.85	06-Nov-28	110	Complex	CRISIL AAA/Stable
INE562A08040		22-Jan-19	8.53	22-Jan-29	600	Complex	CRISIL AAA/Stable
INE562A08057	Tier I Bonds (Basel III)	08-Dec-20	8.44	Perpetual	1048	Highly Complex	CRISIL AA/Stable
INE562A08065	Tier 1 bonds(Basel III)	14- Dec-20	8.44	Perpetual	560	Highly Complex	CRISIL AA/Stable
INE562A08073	Tier 1 Bonds(Basel III)	30-Dec-20	8.44	Perpetual	392	Highly Complex	CRISIL AA/Stable
INE562A08081	Tier II Bonds (Basel III)	13-Jan-21	6.18	13-Jan-31	2000	Complex	CRISIL AAA/Stable
INE428A08028	Tier II Bonds (Basel III) - Series I^	20-Jan-15	8.78%	20-Jan-25	500	Complex	CRISIL AAA/Stable
INE428A08044	Tier II Bonds (Basel III) - Series II^	21-Dec-15	8.64%	20-Dec-25	1000	Complex	CRISIL AAA/Stable
INE428A08101	Tier II Bonds (Basel III)^	27-Dec-19	9.53%	27-Dec-29	1500	Complex	CRISIL AAA/Stable
NA	Tier II Bonds (Basel III)*	NA	NA	NA	1000	Complex	CRISIL AAA/Stable
NA	Tier I Bonds (Basel III)*	NA	NA	NA	500	Highly Complex	CRISIL AA/Stable

*yet to be issued

^originally issued by erstwhile Allahabad Bank

 

Annexure: Details of ratings withdrawn

ISIN	Name of instrument	Date of allotment	Coupon rate  (%)	Maturity date	Issue size (Rs crore)	Complexity level
NA	Infrastructure Bonds	NA	NA	NA	1000	Simple
INE562A09055	Bonds (Additional Tier I)	30-Mar-16	11.15	Perpetual	500	Highly Complex
INE562A09048	Upper Tier II Bonds (Basel II)	16-Jul-10	8.67	16-Jul-25	500	Highly Complex

 

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Ind Bank Housing Ltd	Partial	Subsidiary
Indbank Merchant Banking Services Ltd	Partial	Subsidiary
Tamil Nadu Grama Bank	Partial	Associate
Saptagiri Grameena Bank	Partial	Associate
Puduvai Bharathiar Grama Bank	Partial	Associate