Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA+/CRISIL AA[1]/Stable/CRISIL A1+' ratings on the existing debt instruments of IndusInd Bank Limited (IndusInd).

 

The rating reflects the bank’s healthy capitalisation levels with high core equity ratio and comfortable earnings profile marked by healthy pre-provisioning profits. These strengths are partially offset by the relatively moderate resource profile albeit improving with the Bank’s continued focus on granularization of deposits. The Bank has comfortable liquidity buffer and has been maintaining liquidity coverage ratio (LCR) in the range of 117% to 132% during the past four quarters.

 

CRISIL Ratings’ rating on the Tier I bonds (under Basel III) of IndusInd Bank is as per the criteria 'CRISIL Ratings rating criteria for BASEL III-compliant instruments of banks'. CRISIL Ratings evaluates the bank's (i) reserves position (adjusted for any medium-term stress in profitability) and (ii) cushion over regulatory minimum CET1 (including CCB) capital ratios. Also evaluated is the demonstrated track record and management philosophy regarding maintaining sufficient CET1 capital cushion above the minimum regulatory requirements. The bank's eligible reserves to total assets remains comfortable at over 4%. Additionally, the bank has maintained healthy capitalization metrics with total capital ratio ranging above 14.0%-18.4% from March 31, 2019 till March 31, 2023 leading to an average CET1 capital buffer of 6.5% during the same period. The cushion over regulatory capital ratio along with high eligible reserves places the Bank in a comfortable position for servicing its Tier I bonds. A material reduction in this cushion would be a rating sensitivity factor for Tier I bonds.

[1] For Tier I bonds under Basel III

Analytical Approach

For arriving at the ratings, CRISIL Ratings has evaluated the standalone business and financial risk profile of IndusInd Bank.

Key Rating Drivers & Detailed Description

Strengths:

Healthy Capitalisation

Capitalisation metrics of the bank continued to remain healthy as reflected in CET1, Tier 1 and overall capital adequacy ratio (CAR) at 16.4%, 16.9% and 18.4% respectively as on June 30, 2023. The bank had raised around Rs 2,021 crore of equity capital through conversion of warrants issued to promoters in February 2021 and Rs 3,288 crore in September 2020 through preferential allotment. Furthermore, the increased focus of the bank on lending to corporate clients rated A and above (with its share increasing from 63% in March 2020 to 73% in March 2023) has also enhanced the capitalisation profile, owing to its impact on the risk weighted assets.

 

Comfortable earnings profile

The earnings profile of the bank is comfortable marked by healthy pre-provisioning profits. Since fiscal 2019 the ROA was impacted because of higher provisioning expense amidst some slippages and largely due to COVID related challenges on the portfolio. Historically the credit cost has remained in the range of 0.4% to 0.7% between fiscal 2014 to fiscal 2018, which increased to 1.2% in fiscal 2019 due to one-off slippages in corporate loans. During Covid times, the credit costs for the bank stood at 1.6% and 2.4%, including provision buffer set aside, for fiscal 2020 and fiscal 2021 respectively. However, with the re-opening of the economy and improvement in the asset quality metrics, the credit costs improved to 1.0% for fiscal 2023 (1.7% for fiscal 2022), which improved to 0.9% for first three months of fiscal 2024 (Q1 FY24).

 

The bank’s profitability is supported by the healthy net interest margins with some exposure to high yield segments such as vehicle finance and MFI. Additionally, the bank had a strong fee income of about 1.9% in fiscal 2023 which has supported the earnings profile.

 

Consequently, the bank’s ROA too has improved to 1.7% for fiscal 2023 (from 1.3% for fiscal 2022) and annualised ROA of 1.8% for Q1 FY24. The bank’s pre-provisioning profits is one of the highest in the industry at 3.4% of average total assets for fiscal 2023 and 3.3% for Q1 FY24. The provisioning cover ratio (PCR) of the bank was 71% as on June 30, 2023. The bank has additionally set aside standard contingent provisions amounting to Rs 1,700 crore and the standard asset provisions (other than covid related) stood at Rs 1,345 Crs as on June 30, 2023.

 

Weaknesses:

Asset Quality remains monitorable

In the past, the reported asset quality metrics for both corporate and retail segments have been range bound with overall GNPA between 1.0%-1.2% during March 31, 2014 to December 31, 2018. Since fiscal 2019, due to slippage of some corporate accounts and with COVID 19 related stress in the past fiscal, the gross NPA had increased steadily to 2.9% as on June 30, 2021, which has thereafter improved to 2.0% as on June 30, 2023. The GNPA of the Bank is one of the lowest in the industry, with adequate provision coverage of 71% and provision buffer of Rs 1700 cr with total loan related provision standing at 2.4% as on June, 2023. CRISIL Ratings analysis of the top 100 exposures comprising around 45% of the total large and mid-corporate loan book indicate that the incremental slippages from these accounts is expected to remain comfortable in the near term. In the corporate segment, the Bank has exposure to Real Estate developers, Hospitality sector and Gems & Jewellery segments, while on the retail side the bank has exposure to microfinance (MFI) and vehicle finance book which are inherently vulnerable to an economic downturn.

 

The restructured book accounted for 0.7% of the total advances as on June 30, 2023 (0.8% as on March 31, 2023). CRISIL Ratings also understands that the restructuring in the corporate segment is insignificant. The other major restructuring segment is vehicle finance space. As the portfolio grows going forward, ability of the bank to control asset quality metrics remains a key monitorable.

 

Moderate resource profile

The bank has tried to shore up the resource profile with increasing share of retail deposits. Overall, the deposit base for the bank increased by 15% Y-o-Y to Rs 347,047 crore as on June 30, 2023. However, the reliance on bulk deposits and top depositors remains moderately high, albeit declining. The CASA ratio of the bank stood at 40.1% as on June 30, 2023. Concentration in top 20 depositors has been progressively declining with growth in retail and small business deposits. The retail deposits and deposits from small business customers as defined by LCR improved to 43% as on June 23, 2023 (41% as on June 30, 2022). The retail deposits ratio (Savings Accounts + term deposits with ticket size below Rs 1 crore as a proportion of total deposit base) stood at 46.5% as on March 31, 2023. The Bank continues to focus on ramping up the deposit base by tapping other customer segments. The bank’s liquidity position has improved significantly from FY20 and would continually benefit from the increasing granularisation and retailsation of its deposits

 

The average cost of deposits of the bank was 5.3% for fiscal 2023 and 6.1% for Q1 FY24 and was higher than that of similar rated peers. The Bank’s ability to sustain its retail deposit base as it steadily optimises the deposit rates will be a key monitorable.

Liquidity: Strong

The bank's liquidity position is comfortable with liquidity coverage ratio at 132% as on June 30, 2023, against the regulatory requirement of 100%.  The Bank continues to focus on ramping up the deposit base by tapping other customer segments.

 

ESG Profile

CRISIL Ratings believes that Indusind Bank’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

The ESG profile for financial sector entities typically factors in governance as a key differentiator between them. The sector has reasonable social impact because of its substantial employee and customer base and can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, the lending decisions may have a bearing on the environment.

 

Indusind Bank has an ongoing focus on strengthening various aspects of its ESG profile.

 

Indusind Bank’s key ESG highlights: 

• IndusInd Bank has committed to reducing its carbon footprint by 50% by FY 2024-25 over the baseline of FY 2019-20. The Bank also plans to reduce its absolute emissions by 50% by FY 2030-31.
• The bank has supported an installed capacity in excess of 4.5GW in renewable energy power with Rs 14,000 crore sanctions till March 2022. These projects include solar, wind, biomass or biogas and small hydro projects, renewable energy products and renewable energy production/transmission and distribution.
• The share of rural loans in fiscal 2022 increased to 20% as the bank saw scale up of Bharat Merchant Stores, agri-businesses, along with recovery in MFI.
• Majority of the bank’s board members are independent directors. None of the independent directors have tenure of more than 10 years and there is a segregation in chairperson and executive positions. The bank has a dedicated investor grievance redressal mechanism and the disclosures put out by it are extensive.

 

There is growing importance of ESG among investors and lenders. Indusind Bank’s commitment to ESG will play a key role in enhancing stakeholder confidence, given high shareholding by foreign portfolio investors and access to both domestic and foreign capital markets.

Outlook: Stable

CRISIL Ratings believes IndusInd Bank will maintain its healthy capitalisation and comfortable pre-provisioning profitability.

Rating Sensitivity factors

Upward factors

• Improvement in resource profile with a higher share of retail deposits and lower cost of deposits in comparison to peers
• Continued growth momentum with asset quality metrics remaining comfortable and capital position remaining strong with CET1 ratio (including CCB) remaining above 13% on a sustained basis

 

Downward factors

• Higher than expected deterioration in asset quality or earnings profile
• Decline in capital adequacy ratios (including CCB) with CET I remaining below 11% on sustained basis
• Sustained outflow in deposits

About the Bank:

IndusInd Bank is a new-generation private-sector bank; it commenced operations in 1994. The bank has a pan-India presence, with around 6000 branches (including 3394 branches of BFIL) and 2870 automated teller machines (ATMs) as on June 30, 2023. It also has representative office in Dubai, Abu Dhabi and London. The bank has multilateral ties with other banks, ensuring access to more than 95,000 ATMs for its customers. It has four divisions: corporate and commercial banking, consumer banking, global markets group, and transaction banking.

Key Financial Indicators

As on / for the period ended	Unit	3 months ended	Mar-23	Mar-22
		Jun-23
Total Assets	Rs crore	466,993	457,837	401,967
Total income (net of interest expense)	Rs crore	7,077	25,765	22,346
Profit after tax	Rs crore	2,125	7,443	4,805
Gross NPA (standalone)	%	1.9	2	2.3
Overall capital adequacy ratio (standalone)	%	18.4	17.9	18.4
Return on assets*	%	1.8	1.7	1.3

*annualised

Any other information:

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 bank’s Tier-I Bonds (under Basel III) is lower by one notch from the bank's corporate credit rating, in line with CRISIL Rating’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 low profit or a loss, or iii) the bank breaching the minimum regulatory common equity Tier (CET) I ratio. Moreover, given their 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  levels	Rating assigned with outlook
NA	Tier-II Bonds (under Basel III)*	NA	NA	NA	1,200	Complex	CRISIL AA+/Stable
INE095A08058	Bond	9-Dec-16	7.60%	9-Dec-26	1500	Simple	CRISIL AA+/Stable
INE095A08090	Tier-II Bonds (under Basel III)	29-Oct-21	8.11%	29-Oct-31	2800	Complex	CRISIL AA+/Stable
INE095A08082	Tier-I bonds (under Basel III)	28-Mar-19	10.50%	Perpetual	2000	Highly Complex	CRISIL AA/Stable
NA	Short-Term Fixed Deposit Programme	NA	NA	NA	-	Simple	CRISIL A1+
NA	Certificates of Deposit	NA	NA	7-365	40000	Simple	CRISIL A1+

*Yet to be issued