| Indian Overseas Bank | ||||||||||||||||
| 'CRISIL A+/Stable' assigned to Tier II Bonds (Under Basel III) | ||||||||||||||||
| Rating Action | ||||||||||||||||
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| 1 crore = 10 million | ||||||||||||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has assigned its 'CRISIL A+/Stable' rating to the Rs 300 crore Tier II bonds (under Basel III) of Indian Overseas Bank (IOB), while reaffirming the ratings on the existing debt instruments, fixed deposit programme, and certificates of deposit programme at 'CRISIL A+/CRISIL A-/FAA/Stable/CRISIL A1+'. |
| Analytical Approach |
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The ratings factor in expectation of continued timely support from the majority owner, GoI, 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. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Expectation of strong support from majority owner, Government of India The rating continues to factor in 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 PSBs and the guardian of India's financial system. The stability of the banking sector is of prime importance to the government, 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. The majority ownership creates a moral obligation on GoI to support PSBs, including IOB. As part of the Indradhanush framework, the government 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. Further, in October 2017, the government had outlined a recapitalisation package of Rs 2.11 lakh crore over fiscals 2018 and 2019; IOB received Rs 4,694 crore in fiscal 2018 and Rs 5,963 crore in fiscal 2019. Weaknesses: * Weak asset quality Asset quality remains weak, with NPA ratios significantly higher than the industry average; this is expected to remain at high levels over the next few quarters. Gross NPAs stood at 22.53% as on June 30, 2019 (21.97% as on March 31, 2019; 25.28% as on March 31, 2018). In absolute terms, the NPAs declined marginally in the first quarter of fiscal 2020, as compared to the previous quarter, however, in percentage terms, the ratio increased to 22.53% as on June 30, 2019, partially due to shrinkage of the corporate and overseas loan portfolio. While slippages to NPAs (annualized; as a percentage of net opening advances) have declined to 5.8% in the first quarter of fiscal 2020 as compared with 7.8% in the first quarter of fiscal 2019, they remain high. As on June 30, 2019, the total exposure in special mention account 1 and 2 categories (accounts of Rs 5 crore and above) stood at around Rs 5,560 crore, which could further add to the stress on asset quality. Restructured standard advances stood at Rs 156.3 crore constituting around 0.1% of gross advances as on June 30, 2019. As on June 30, 2019, the NCLT exposure stood at around Rs.19,382 crore. Of these NCLT accounts, recoveries of Rs 837.3 crore were received as of June 30, 2019. Over the next few quarters, slippages to NPAs should moderate as compared with the past couple of fiscals, but overall NPAs will remain high. The recoveries may improve, aided by resolutions under the Insolvency and Bankruptcy Code. However, the ability to contain deterioration in asset quality will remain a key monitorable. * Weak earnings The deterioration in asset quality has impacted earnings amidst high provisioning metrics. The pre-provisioning profit was Rs 828 crore for the first quarter ended June 30, 2019 as compared to Rs.1132 crore in the corresponding period of previous year. However, there was a net loss of Rs 342 crore (annualised return on assets at a negative 0.55%) for the first quarter ended June 30, 2019 (net loss of Rs 3738 crore in fiscal 2019), primarily on account of high provisioning cost, which stood at around 1.86%( annualized) of average assets. Provisioning cost is expected to remain high over the next few quarters given the asset quality challenges and additional provisioning requirement on account of ageing of NPAs. Furthermore, the net interest margin, at 2.1%1 for both, the first quarter of fiscal 2020 and fiscal 2019, was lower than the PSB average, adversely impacting overall profitability. The provision coverage ratio stood at 57.4%2 as on June 30, 2019 (57% as on March 31, 2019 and 46.5% as on March 31, 2018). Profitability is likely to remain significantly under pressure over the next few quarters primarily because of the sustained pressure on asset quality and increasing provisioning requirements on stressed assets; the earnings level will continue to be a key rating sensitivity factor. * Weak capitalisation ratios CET 1, Tier 1, and overall CAR were 7.59%, 7.62%, and 10.02%, respectively, as on June 30, 2019. Capitalisation has remained weak on account of high provisioning requirement, which had resulted in higher and continued losses. The government's capital infusion of Rs 4,694 crore and Rs 5,963 crore in fiscals 2018 and 2019, respectively, has supported capital ratios to some extent. Capitalisation is primarily driven by continued government support, which is critical in the context of making coupon payments on hybrid instruments issued under Basel II. The next such coupon payment is due in September 2019. The bank will require timely equity infusion from the government to stay above the minimum regulatory capital ratios for servicing of coupon payments. |
| Liquidity |
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Liquidity is adequate, supported by a sizeable retail deposit base that forms a significant part of the total deposits. Liquidity coverage ratio was 465.5% as on June 30, 2019, against the regulatory requirement of 100%. The excess statutory liquidity ratio was Rs 6892 crore (3.1%) as on that date. Liquidity also benefits from access to systemic sources of funds such as the liquidity adjustment facility from the Reserve Bank of India, the call money market, and refinance limits from sources such as National Housing Bank and National Bank for Agriculture and Rural Development. |
| Outlook: Stable |
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CRISIL believes IOB will continue to benefit from strong government support. Asset quality and profitability are, however, expected to remain under pressure over the medium term. |
| About the Bank |
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Established in 1937 by Mr M Ct M Chidambaram Chettyar, IOB was nationalised in 1969. Headquartered in Chennai, the bank had 3,274 domestic branches, 4 overseas branches, and 3,011 ATMs (automated teller machines) as on June 30, 2019. |
| Key Financial Indicators | ||||||||||||||||||||||||||||
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
| Annexure - Details of Instrument(s) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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