Rating Rationale
August 25, 2020 | Mumbai
Indian Bank
'CRISIL AAA/CRISIL AA/Negative' assigned to debt instruments
 
Rating Action
Rs.2000 Crore Tier II Bonds (Under Basel III) CRISIL AAA/Negative (Assigned)
Rs.2000 Crore Tier I Bonds (Under Basel III) CRISIL AA/Negative (Assigned)
Rs.1000 Crore Infrastructure Bonds CRISIL AAA/Negative (Reaffirmed)
Rs.600 Crore Tier II Bonds (Under Basel III) CRISIL AAA/Negative (Reaffirmed)
Rs.1000 Crore Tier II Bonds (Under Basel III) CRISIL AAA/Negative (Reaffirmed)
Rs.500 Crore Lower Tier-II Bonds (under Basel II) CRISIL AAA/Negative (Reaffirmed)
Rs.500 Crore Upper Tier-II Bonds (under Basel II) CRISIL AAA/Negative (Reaffirmed)
Rs.1000 Crore Tier I Bonds (Under Basel III) CRISIL AA/Negative (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL AAA/Negative' and 'CRISIL AA/Negative' ratings to the Rs 2,000 crore Tier II Bonds (under Basel III) and Rs 2,000 crore Tier I Bonds (under Basel III), respectively, of Indian Bank. CRISIL has reaffirmed its 'CRISIL AAA/CRISIL AA/Negative' ratings on the bank's existing long-term debt instruments.

On August 18, 2020, CRISIL removed its rating on the long-term debt instruments of Indian Bank from 'Watch with Developing implications' and reaffirmed its 'CRISIL AAA' rating and assigned a 'Negative' outlook to the Tier II Bonds (under Basel III), Infrastructure Bonds, Upper Tier II Bonds (under Basel II) and Lower Tier II Bonds (under Basel II). The rating on Tier I Bonds (under Basel III) was downgraded to 'CRISIL AA' from 'CRISIL AA+' and assigned a 'Negative' outlook in line with CRISIL's criteria for rating hybrids issued by banks under Basel III (refer to 'CRISIL's rating criteria for BASEL-III compliant instruments').

CRISIL had placed the ratings on the bank's long-term debt instruments on 'Watch with Developing Implications' on December 20, 2019, given the significant progress in the amalgamation of Allahabad Bank with Indian Bank, and pending clarity on the business and financial risk profiles of the combined entity.

The watch resolution follows the completion of amalgamation of both the banks, effective April 1, 2020, with clarity on the credit risk profile of the merged entity.

The 'CRISIL AAA' rating on the Tier II Bonds (under Basel III), Infrastructure Bonds, Upper Tier II Bonds (under Basel II) and Lower Tier II Bonds (under Basel II) continues to factor in the expectation of strong support for Indian Bank from its majority owner, the Government of India (GoI). The rating also reflects the merged entity's larger balance sheet, wider geographic reach leading to deeper penetration, strong resource profile with high proportion of current and savings account (CASA) deposits, and adequate capitalisation.

The 'Negative' outlook on the debt instruments reflects the potential stress that the bank's asset quality and consequently its profitability may witness on account of the challenging macro environment. Post the amalgamation, Indian Bank's asset quality metrics have weakened as compared to peers in the same rating category. Gross non-performing assets (NPAs) of the bank stood at 11.4% as on April 1, 2020. Also, the combined entity reported a loss of Rs 4,643 crore for fiscal 2020 with a return on assets (RoA) of negative 0.8%. While the first quarter of fiscal 2021 saw some improvement, with gross NPAs at 10.9% and profit after tax (PAT) of Rs 369 crore due to reduction in slippages and provisioning expenses, continued improvement in performance is a key rating sensitivity factor.

The downgrade in the rating on Tier I bonds (under Basel III) is on account of lower eligible reserves of the merged bank. CRISIL notches down the rating on these instruments from the bank's corporate credit rating. CRISIL evaluated the adequacy of Indian Bank's eligible reserves to service coupon after adjusting for any medium-term impact of profitability on the bank's reserves position in a stress scenario.

The nationwide lockdown to contain the spread of the Covid-19 pandemic has impacted disbursements and collections of financial institutions. The lockdown has been eased in a phased manner. However, certain states have implemented local lockdowns. CRISIL believes the eventual lifting of restrictions will be in a phased manner. Any delay in return to normalcy will put further pressure on collections and asset quality metrics of financial institutions.

Indian Bank has provided moratorium to its borrowers in line with the relief measures provided by the Reserve Bank of India (RBI). Any change in the payment discipline of borrowers could affect asset quality post the moratorium. Also, while the one-time restructuring scheme announced by RBI will provide the necessary support to affected borrowers in the current environment, the details and operational implementation of the same will have to be seen.

Analytical Approach

For arriving at the ratings, CRISIL 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 has also factored in the strong support that the bank is likely to receive from GoI, both on an ongoing basis and during distress.

Please refer Annexure - List of entities consolidated, 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 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.
 
As part of the Indradhanush framework, GoI had pledged to infuse at least Rs 70,000 crore in PSBs over fiscals 2015 to 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 and 2019; Indian Bank and Allahabad 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
Indian Bank's capitalisation is adequate with Common Equity Tier-1 (CET 1) ratio, Tier-I capital adequacy ratio (CAR) and overall CAR at 10.3%, 10.5% and 13.5%, respectively, as on June 30, 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 GoI stake at 88.06% as on June 30, 2020. The capital level is also supported by regular infusion from GoI. Indian Bank's capitalisation provides cushion against asset-side risks. Its networth coverage for net NPAs was 2.8 times as on June 30, 2020 (2.4 times as on April 1, 2020).
 
* Healthy resource profile:
Indian Bank's resource profile has strengthened post the amalgamation with Allahabad Bank, with the proportion of low-cost CASA deposits at 41.5% as on June 30, 2020. The proportion remains above the industry average which helps Indian Bank maintain its cost of deposits (CoD) at a manageable level. CoD was 5.3% during fiscal 2020. Moreover, the proportion of highly stable retail deposits (retail term deposits and savings account deposits), at around 95% of total deposits as on June 30, 2020, supports the resource profile.

The bank's resource profile is also expected to benefit from the increased reach post amalgamation with a wider and sizeable domestic branch network comprising 6,062 branches and 4,816 ATMs as on June 30, 2020.
 
Weaknesses:
* Modest asset quality
Asset quality is modest with gross NPA ratio at 10.9% as on June 30, 2020 (11.4% as on April 1, 2020). In spite of increase in slippages from Rs 17,171 crore during fiscal 2019 to Rs 18,369 crore in fiscal 2020 on account of slippage in a few large ticket accounts, absolute gross NPAs remained stable primarily due to higher write-offs in the loan book. Gross NPAs from the corporate segment stood at 13.6% followed by agriculture (13.5%), micro, small and medium enterprises (10.5%) and retail (3.8%).
 
As on February 29, 2020, total exposure in special mention account (SMA) 1 and 2 categories was around Rs 27,900 crore, which could add to the stress on asset quality. Also, asset quality will be under pressure because of the Covid-19 pandemic and possible slowdown in recoveries over the medium term. This could be partly offset by the restructuring scheme. Ability to contain deterioration in asset quality will remain a key monitorable.
 
* Weak earnings profile
Profitability has been constrained by high provisioning. The bank reported a net loss of Rs 4,643 crore (RoA at a negative 0.8%) for fiscal 2020 (net loss of Rs 8,012 crore in fiscal 2019). The loss narrowed due to lower provisioning expenses of Rs 13,609 crore in fiscal 2020 as against Rs 15,696 crore in the previous fiscal. Moreover, the bank reported PAT and an annualised RoA of Rs 369 crore and 0.3%, respectively, for the quarter ended June 30, 2020. Also, provisioning coverage ratio (PCR) was stable at 68% as on June 30, 2020. The net interest margin remained modest at 2.7% (annualised) for the quarter through June 2020 (2.4% for fiscal 2020). Profitability is a key monitorable given the current challenging environment due to Covid-19, and earnings 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 161.6% and excess statutory liquidity was Rs 34,261 crore as on June 30, 2020. The bank's 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: Negative

CRISIL believes Indian Bank will continue to benefit from strong government support. The 'Negative' outlook on the debt instruments reflects the potential stress on the bank's asset quality, and consequently its profitability, on account of the challenging macro environment.

Rating Sensitivity factors
Upward factors:
* Continuous improvement in earnings with RoA more than 0.4%
* Sustained and substantial improvement in asset quality.
 
Downward factors:
* More-than-expected deterioration in asset quality due to increasing slippages, with gross NPAs crossing 13%, thereby impacting earnings
* Significant and sustained decline in CARs (including capital conservation buffer [CCB], which is Tier I of 9.5% and overall CAR of 11.5%).
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 GoI's ownership to 80%. GoI's ownership stood at 88.06% as on June 30, 2020, post issuing shares under amalgamation to the shareholders of Allahabad Bank.
 
Amalgamation of Allahabad Bank into Indian Bank was effective from April 1, 2020. Post amalgamation, the merged entity enjoys the benefits of larger balance sheet, optimised capital utilisation and wider geographic reach leading to deeper penetration. Indian Bank has now a strong domestic branch network comprising 6,062 branches and 4,816 ATMs. Additionally, the bank has international presence through three overseas branches (one each in Singapore, Colombo, and Jaffna) as on June 30, 2020.
 
As on June 30, 2020, gross advances stood at Rs 3,66,787 crore (Rs 3,68,664 crore as on April 1, 2020) and deposits at Rs 4,89,109 crore (Rs 4,88,835 crore).
 
In fiscal 2020, the combined bank reported a loss of Rs 4,643 crore and 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 quarter ended June 30, 2020, the bank reported a PAT of Rs 369 crore and total income (net of interest expense) of Rs 5,202 crore.

Note: Income statement numbers/ratios represents proforma merged entity financials

Key Financial Indicators - Indian Bank
As on March 31, Unit 2020 2019
Total Assets Rs Crore 567229 525869
Total income (net of interest expenses) Rs Crore 18826 16112
Profit after tax Rs Crore -4643 -8012
Gross NPA % 11.4% 12.0%
Overall capital adequacy ratio % 13.3% 12.9%
Return on assets (annualized) % -0.8% -1.6%

Any other information: Not applicable

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 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 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 Indian Bank's corporate credit rating to 'CRISIL AA' in line with CRISIL's criteria (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 reserves 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 cr)		 Complexity
level		 Rating outstanding
with outlook
NA Infrastructure Bonds* NA NA NA 1000 Simple CRISIL AAA/Negative
INE562A09055 Bonds (Additional Tier I) 30-Mar-16 11.15 Perpetual 500 Highly
Complex		 CRISIL AA/Negative
NA Bonds (Additional Tier I)* N.A N.A N.A 500 Highly
Complex		 CRISIL AA/Negative
INE562A08016 Bonds (Basel III Compliant Tier II Bonds) 28-July-16 8.1 28-July-26 600 Complex CRISIL AAA/Negative
INE562A08024 Bonds (Basel III Compliant Tier II Bonds)* 30-oct-18 8.90 30-oct-28 290 Complex CRISIL AAA/Negative
INE562A08032 06-Nov-18 8.85 06-Nov-28 110 Complex CRISIL AAA/Negative
INE562A08040 22-Jan-19 8.53 22-jan-29 600 Complex CRISIL AAA/Negative
INE562A09048 Upper Tier II Bonds (Basel II) 16-Jul-10 8.67 16-Jul-25 500 Highly
Complex		 CRISIL AAA/Negative
INE562A09030 Lower Tier II Bonds (Basel II) 28-Jun-10 8.53 28-Jun-20 500 Complex CRISIL AAA/Negative
NA Tier I Bonds (Basel III)* NA NA NA 2000 Highly
Complex		 CRISIL AA/Negative
NA Tier II Bonds (Basel III)* NA NA NA 2000 Complex CRISIL AAA/Negative
*Yet to be issued
 
Annexure - List of entities consolidated
Entity consolidated Extent of consolidation Rationale for consolidation
Ind Bank Housing Ltd Full Subsidiary
Indbank Merchant Banking Services Ltd Full Subsidiary
Tamil Nadu Grama Bank Partial Associate
Saptagiri Grameena Bank Partial Associate
Puduvai Bharathiar Grama Bank Partial Associate
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Infrastructure Bonds  LT  0.00
25-08-20  		CRISIL AAA/Negative  18-08-20  CRISIL AAA/Negative  20-12-19  CRISIL AAA/Watch Developing  31-12-18  CRISIL AAA/Stable  06-11-17  CRISIL AAA/Stable  -- 
            05-09-19  CRISIL AAA/Stable  30-11-18  CRISIL AAA/Stable       
Lower Tier-II Bonds (under Basel II)  LT  500.00
25-08-20  		CRISIL AAA/Negative  18-08-20  CRISIL AAA/Negative  20-12-19  CRISIL AAA/Watch Developing  31-12-18  CRISIL AAA/Stable  06-11-17  CRISIL AAA/Stable  CRISIL AAA/Negative 
            05-09-19  CRISIL AAA/Stable  30-11-18  CRISIL AAA/Stable  08-05-17  CRISIL AAA/Stable   
                    31-03-17  CRISIL AAA/Stable   
Tier I Bonds (Under Basel III)  LT  500.00
25-08-20  		CRISIL AA/Negative  18-08-20  CRISIL AA/Negative  20-12-19  CRISIL AA+/Watch Developing  31-12-18  CRISIL AA+/Stable  06-11-17  CRISIL AA+/Stable  CRISIL AA/Negative 
            05-09-19  CRISIL AA+/Stable  30-11-18  CRISIL AA+/Stable  08-05-17  CRISIL AA+/Stable   
                    31-03-17  CRISIL AA/Stable   
Tier II Bonds (Under Basel III)  LT  1000.00
25-08-20  		CRISIL AAA/Negative  18-08-20  CRISIL AAA/Negative  20-12-19  CRISIL AAA/Watch Developing  31-12-18  CRISIL AAA/Stable  06-11-17  CRISIL AAA/Stable  CRISIL AAA/Negative 
            05-09-19  CRISIL AAA/Stable  30-11-18  CRISIL AAA/Stable  08-05-17  CRISIL AAA/Stable   
                    31-03-17  CRISIL AAA/Stable   
Upper Tier-II Bonds (under Basel II)  LT  500.00
25-08-20  		CRISIL AAA/Negative  18-08-20  CRISIL AAA/Negative  20-12-19  CRISIL AAA/Watch Developing  31-12-18  CRISIL AAA/Stable  06-11-17  CRISIL AAA/Stable  CRISIL AAA/Negative 
            05-09-19  CRISIL AAA/Stable  30-11-18  CRISIL AAA/Stable  08-05-17  CRISIL AAA/Stable   
                    31-03-17  CRISIL AAA/Stable   
All amounts are in Rs.Cr.
Links to related criteria
Rating Criteria for Banks and Financial Institutions
CRISILs Criteria for Consolidation
Criteria for Notching up Stand Alone Ratings of Entities Based on Government Support
Rating Criteria for Hybrid Capital instruments issued by banks under Basel II guidelines
Rating criteria for Basel III - compliant non-equity capital instruments

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