Rating Rationale
March 09, 2018 | Mumbai
IndusInd Bank Limited
Rated amount enhanced  
Rating Action
Rs.1500 Crore Infrastructure Bond Issue CRISIL AA+/Stable (Reaffirmed)
Rs.1000 Crore Tier-I Bonds (Under Basel III) CRISIL AA/Stable (Reaffirmed)
Rs.1000 Crore Tier-I Bonds (Under Basel III) CRISIL AA/Stable (Reaffirmed)
Rs.40000 Crore Certificate of Deposits (Enhanced from Rs.25000 Crore)  CRISIL A1+ (Reaffirmed)
Short-Term Fixed Deposit Programme CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its ratings on the debt instruments of IndusInd Bank Limited (IndusInd Bank) at 'CRISIL AA+/CRISIL AA1/Stable/CRISIL A1+'.

The ratings reflect IndusInd's strong capitalisation, healthy asset quality, and comfortable earnings profile. The bank's resource profile has been progressively improving.

On October 14, 2017, CRISIL had reaffirmed its rating on IndusInd Bank post the announcement that the bank's Board had approved a Composite Scheme of Arrangement, as per which, Bharat Financial Inclusion Ltd (BFIL) would be merged with IndusInd Bank. The merger is expected to strengthen the lending business of the bank by enhancing its reach; the combined entity will have large branch network which would significantly increase IndusInd Bank's footprint in rural areas. Further, reduction in cost of borrowings for BFIL as well as monetisation of priority sector lending (PSL) assets would aid profitability metrics of IndusInd Bank. The entire book of BFIL currently classifies under PSL, surplus of which over the regulatory cap can be monetised aiding fee income. The capitalization metrics of the merged entity are also expected to remain strong.

Key Rating Drivers & Detailed Description
* Strong Capitalisation
Absolute networth of IndusInd Bank increased to Rs 22,940 crore as on December 31, 2017, from Rs 19,883 crore as on December 31, 2016. CET 1, Tier-I and overall capital adequacy ratios were healthy at 14.07%, 15.33% and 15.83% respectively as on December 31, 2017 (13.81%, 15.09% and 15.63%, respectively, as on December 31, 2016). The large capital base, coupled with healthy asset quality, led to a better-than-peers networth coverage for net non-performing assets (NPAs) of around 39 times as on December 31, 2017. Capitalisation is further supported by a demonstrated ability to raise capital on a regular basis and comfortable accretion to networth. The bank has raised equity capital on several occasions over the past few years to support its strong growth plans. Capitalisation is likely to remain strong on account of the ability to raise capital on an ongoing basis as also due to the effect of the merger with BFIL which has higher capitalisation ratios, and will support credit growth and cover asset-side risks over the medium term.

* Healthy Asset Quality
The bank has also demonstrated its ability to maintain asset quality through cycles and its management is proactive in handling potential stress in the lending portfolio. Despite a five-year compound annual growth of around 27% in advances till March 31, 2017, gross NPAs have been significantly better than the industry average. Gross NPAs stood at 1.16% as on December 31, 2017, against 0.94% as on December 31, 2016. Slippages were also low at 1.8% in the first nine months of fiscal 2018. CRISIL expects asset quality to remain healthy over the medium term.

* Comfortable Earnings Profile
The comfortable earnings profile is supported by healthy interest spreads and a diversified core fee income. The return on assets ratio of around 1.86% (annualized) in the first nine months of fiscal 2018 against 1.82% to that a year earlier, remains higher than the industry average. Yield on the loan portfolio is among the highest in the industry, supported by a large proportion of retail loans, partially offsetting the impact of a higher cost of borrowing. Fee income is also among the highest in the industry; this has been driven by significant cross-selling of products and thrust on trade and supply-chain financing, third-party product distribution, transactional services such as cash management, and foreign exchange products. Post the merger with BFIL, monetisation of PSL assets would aid fee income for the bank. The high fee income partially offsets the higher-than-industry-average operating expense ratio. The bank's ability to maintain healthy interest spreads and core fee income on a steady-state basis will remain a key rating monitorable.

* Resource Profile
The proportion of low-cost current account and savings account (CASA) deposits has been improving progressively, increasing to 42.9% of total deposits as on December 31, 2017, from 37.1% a year earlier. This has been attained by focusing on extending innovative products and services with increasing the branch network. Though the cost of funds reduced to around 6.2% in fiscal 2017 (from 6.7% in fiscal 2016), it remains higher than peers, driven by the large proportion of wholesale deposits (although declining), and competitive-rate savings account deposits. Ability to sustain the improved proportion of CASA deposits and reduce dependence on wholesale deposits, thereby managing cost of funds, will remain key monitorables. Post the merger, greater reach for IndusInd Bank would allow them access to a larger depositor base which is expected to support the resource profile.
Outlook: Stable

CRISIL believes IndusInd Bank will maintain its robust capitalisation and strong asset quality, while achieving an above-average growth in its loan book, over the medium term. The bank is also expected to sustain its healthy earnings profile over this period. The outlook may be revised to 'Positive' in case of sustainable growth while maintaining asset quality and improving the resource profile. The outlook may be revised to 'Negative' if asset quality and earnings profile weaken.

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 1320 branches and 2162 automated teller machines (ATMs) as on December 31, 2017. It also has one representative office each in Dubai 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.

For the first nine months ended December 31, 2017, profit after tax (PAT) was Rs 2653 crore on total income (net of interest expense) of Rs 9032 crore, as against PAT of Rs 2116 crore on total income (net of interest expense) of Rs 7355 crore in the corresponding period of the previous fiscal.

In fiscal 2017, PAT was Rs 2868 crore on total income (net of interest expense) of Rs 10234 crore compared to Rs 2286.5 crore on total income (net of interest expense) of Rs 7813.5 crore in fiscal 2016.

1For Tier I bonds under Basel III

Key Financial Indicators
As on / for the period ended December 31 Unit   2017  2016
Total Assets Rs. Cr. 200703 167,102
Total income Rs. Cr. 16172 13535
Profit after tax Rs. Cr. 2,653 2,653
Gross NPA % 1.16 1.08
Overall capital adequacy ratio  % 15.83 15.63
Return on assets % 1.86 1.82

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.
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 bank's tier-I Bonds (under Basel III) is lower by one notch from the bank's corporate credit rating, 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 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.Cr) Rating Outstanding with Outlook
INE095A08058 Bond 09-Dec-2016 7.6% 09-Dec-2026 1500 CRISIL AA+/Stable
INE095A08066 Tier-I bonds (under Basel III) 22-Mar-2017 9.5% Perpetuity 1000 CRISIL AA/Stable
NA Short-Term Fixed Deposit Programme NA NA NA 0 CRISIL A1+
NA Certificates of Deposits NA NA 7-365 Days 40000 CRISIL A1+
INE095A08074 Tier-I bonds (under Basel III) 18-Apr-2017 9.5% Perpetuity 1000 CRISIL AA/Stable
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Certificate of Deposits  ST  40000  CRISIL A1+    No Rating Change    No Rating Change    No Rating Change    No Rating Change  CRISIL A1+ 
Infrastructure Bonds  LT  1500  CRISIL AA+/Stable    No Rating Change    No Rating Change  27-12-16  CRISIL AA+/Stable    --  -- 
Short Term Fixed Deposit Programme  ST  CRISIL A1+    No Rating Change    No Rating Change    No Rating Change    No Rating Change  CRISIL A1+ 
Tier I Bonds (Under Basel III)  LT  2000  CRISIL AA/Stable    No Rating Change  09-03-17  CRISIL AA/Stable    --    --  -- 
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
Links to related criteria
Rating Criteria for Banks and Financial Institutions
CRISILs Criteria for rating short term debt
Rating criteria for Basel III - compliant non-equity capital instruments

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