Rating Rationale
March 20, 2019 | Mumbai
IndusInd Bank Limited
'CRISIL AA/Stable' assigned to Tier-I Bonds (Under Basel III)
Rating Action
Rs.2000 Crore Tier-I Bonds (Under Basel III) CRISIL AA/Stable (Assigned)
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.1500 Crore Infrastructure Bond Issue CRISIL AA+/Stable (Reaffirmed)
Rs.40000 Crore Certificate of Deposits  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 assigned its 'CRISIL AA/Stable' rating to the Rs 2000 crore Tier-I bonds (under Basel III) of IndusInd Bank Ltd (IndusInd Bank) and reaffirmed its 'CRISIL AA+/CRISIL AA1/Stable/CRISIL A1+' ratings on the existing debt instruments of the bank.
The ratings continue to reflect the continued ramp up in the loan book, strong capitalisation levels, comfortable earnings profile and healthy asset quality. IndusInd Bank's net advances have grown at a compound annual growth rate (CAGR) of 27% during fiscals 2014-2018 and further expanded by 35% (year-on-year) reaching Rs 1,73,169 crores as on December 31, 2018. With the merger with Bharat Financial Inclusion Ltd (BFIL) almost at the completion stage, IndusInd Bank would get access to the branch network of BFIL which would enable further growth.
Capitalisation metrics of the bank remain strong as reflected in the comfortable CET1, Tier 1 and overall capital adequacy ratio (CAR) at 12.8%, 13.8% and 14.2% respectively as on December 31, 2018. Further, networth stood at around Rs 26,400 crores as on December 31, 2018, providing adequate cushion against asset side risk with networth to net NPA ratio at 25.7 times. The merger with BFIL would further strengthen the capitalisation metrics of the bank.
Whilst growth has been strong, asset quality metrics have remained resilient so far with gross non-performing assets (GNPA) ranging between 0.8%-1.2% during the same period. Although the slippages ratio is expected to increase in the short term due to stress observed in one exposure for which adequate provision has been set aside as a proactive measure, GNPA ratio of the bank would remain comfortable and compare favourably with peers and the industry average. Earnings profile also remains comfortable with an average return on assets (RoA) of around 1.8% during 2014-2018 and 1.6% in in the nine months ended December 31, 2018. Upon merger of BFIL, ROA is expected to improve with increase in net interest margins.
CRISIL's rating on the Tier I bonds (under Basel III) of IndusInd Bank is as per the criteria 'CRISIL's rating criteria for BASEL III-compliant instruments of banks'. CRISIL 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 over 5.5% as of March 31, 2018, with adequate CET1 capital buffer of 7.4% as on March 31, 2018 (CET1 ratio of 14.87% compared to the regulatory minimum of 7.48%).

Analytical Approach

For arriving at the ratings, CRISIL has evaluated the standalone business and financial risk profile of IndusInd Bank. Once the merger process of IndusInd and BFIL is completed, CRISIL will evaluate the consolidated business and financial risk profile.

Key Rating Drivers & Detailed Description
*Strong Capitalisation
Absolute networth of IndusInd Bank increased to Rs 26,400 crore as on December 31, 2018, from Rs 22,940 crore as on December 31, 2017. CET 1, Tier-I and overall CAR were healthy at 12.8%, 13.8% and 14.2% respectively as on December 31, 2018. 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 26 times as on December 31, 2018. 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 CAGR of around 27% in advances till March 31, 2018, gross NPAs have been significantly better than the industry average. Gross NPAs stood at 1.13% as on December 31, 2018, against 1.16% as on December 31, 2017. Although the slippages ratio is expected to increase in the short term due to stress observed in one exposure, for which adequate provision has been set aside as a proactive measure, GNPA ratio of the bank would remain comfortable and compare favourably with peers and the industry average. Going forward as well CRISIL expects the GNPA metrics for the bank to remain comfortable. Bank's restructured assets are insignificant and lowest in the industry.
* Comfortable Earnings Profile
The comfortable earnings profile is supported by healthy interest spreads and a diversified core fee income. The high share of fee income 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. Fee income as a percentage of average total assets stood at around 2.3% (annualised) for the nine months ended December 31, 2018 and has ranged between 2.3-2.6% over the past five fiscals. Almost 50% of the fee income for the bank is from distribution fees, loan processing fees and general banking fees which is a stable source of income.
However, the earnings profile was impacted in the first nine months of fiscal 2019 amidst elevated credit costs as the bank proactively provided for an exposure. Consequently, the return on assets ratio dropped to around 1.6% (annualized) in the first nine months of fiscal 2019 against 2.0% to the corresponding period a year earlier. Given the expectation of slippages in the fourth quarter of fiscal 2019, RoA metrics are expected to decline, however, CRISIL expects them to still remain around 1.5%-1.6% which would remain comfortable. Post the merger with BFIL, monetisation of PSL assets would also aid fee income for the bank and also, ROA is expected to improve with increase in net interest margins.
*Average, albeit improving resource profile
The proportion of low-cost current account and savings account (CASA) deposits has been improving progressively, increasing to 43.6% of total deposits as on December 31, 2018, from 42.9% a year earlier. However, the average cost of deposits of the bank remains high at around 5.8% for fiscal 2018 which is a result of the differentiated savings rate offered by the bank. Further, concentration risk in the banks depositor profile is high, albeit declining, as the top 20 depositors contributed to around 24% of total 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 retail depositor base which is expected to support the resource profile.

The bank's liquidity position is comfortable with liquidity coverage ratio at 102.15% as on December 31, 2018, against the regulatory requirement of 90%. 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 SIDBI and National Bank for Agriculture and Rural Development.

Outlook: Stable

CRISIL believes IndusInd Bank will maintain its robust capitalisation and healthy asset quality, while achieving an above-industry average growth in its loan book, over the medium term. The bank is also expected to sustain its comfortable 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 1558 branches and 2453 automated teller machines (ATMs) as on December 31, 2018. 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.
For the first nine months ended December 31, 2018, profit after tax (PAT) was Rs 2941 crore on total income (net of interest expense) of Rs 10,702 crore, as against PAT of Rs 2653 crore on total income (net of interest expense) of Rs 9,031 crore in the corresponding period of the previous fiscal.
In fiscal 2018, PAT was Rs 3,606 crore on total income (net of interest expense) of Rs 12,248 crore compared to Rs 2,868 crore on total income (net of interest expense) of Rs 10,234 crore in fiscal 2017.

1For Tier I bonds under Basel III.

Key Financial Indicators
As on/for the period ended December 31 Unit 2018 2017
Total Assets Rs crore 256,199 200,703
Total income Rs crore 20,357 16,172
Profit after tax Rs crore 2,941 2,653
Gross NPA % 1.13 1.16
Overall capital adequacy ratio  % 14.2 15.8
Return on assets % 1.6 2.0

Any other information
Annexure: Key features of IndusInd Bank's Rs 2,000 crore Tier I bond issue (under Basel III)

  • The bonds are non-convertible, perpetual, unsecured, and Basel III-compliant.
  • Coupon payments shall be annual and non-cumulative.
  • The bank has full discretion at all times to cancel coupon payments.
  • The coupons must be paid out of distributable items. In this context, coupon may be paid out of current year profits. However, if current year profits are not sufficient, coupon may be paid subject to availability of sufficient eligible reserves (subject to the bank meeting minimum regulatory requirements for CET I, Tier I, and total capital ratios at all times as prescribed by the RBI) and/or credit balance in profit and loss account, if any.
  • Dividend stopper clause as defined in the guidelines is applicable.
  • Loss-absorption features as per the RBI's Basel III norms are applicable.
  • Instrument will be temporarily written down upon CET I breaching the pre-specified trigger of 5.5% before March 31, 2019, and 6.125% on or after March 31, 2019
  • The instrument may be permanently written off at the option of RBI on occurrence of point of non-viability (PONV) trigger. The PONV trigger shall be determined by the RBI.
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.
Note on complexity levels of the rated instrument:
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
NA Tier-I bonds (under Basel III)* NA NA NA 2000 CRISIL AA/Stable
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 40000 CRISIL A1+
INE095A08074 Tier-I bonds (under Basel III) 18-Apr-2017 9.5% Perpetuity 1000 CRISIL AA/Stable
*Yet to be issued
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Certificate of Deposits  ST  40000.00  CRISIL A1+  26-02-19  CRISIL A1+  09-03-18  CRISIL A1+  26-10-17  CRISIL A1+  27-12-16  CRISIL A1+  CRISIL A1+ 
                20-09-17  CRISIL A1+  29-11-16  CRISIL A1+   
                31-03-17  CRISIL A1+       
                09-03-17  CRISIL A1+       
Infrastructure Bonds  LT  1500.00
CRISIL AA+/Stable  26-02-19  CRISIL AA+/Stable  09-03-18  CRISIL AA+/Stable  26-10-17  CRISIL AA+/Stable  27-12-16  CRISIL AA+/Stable  -- 
                20-09-17  CRISIL AA+/Stable       
                31-03-17  CRISIL AA+/Stable       
                09-03-17  CRISIL AA+/Stable       
Short Term Fixed Deposit Programme  ST  0.00  CRISIL A1+  26-02-19  CRISIL A1+  09-03-18  CRISIL A1+  26-10-17  CRISIL A1+  27-12-16  CRISIL A1+  CRISIL A1+ 
                20-09-17  CRISIL A1+  29-11-16  CRISIL A1+   
                31-03-17  CRISIL A1+       
                09-03-17  CRISIL A1+       
Tier I Bonds (Under Basel III)  LT  3000.00
CRISIL AA/Stable  26-02-19  CRISIL AA/Stable  09-03-18  CRISIL AA/Stable  26-10-17  CRISIL AA/Stable    --  -- 
                20-09-17  CRISIL AA/Stable       
                31-03-17  CRISIL AA/Stable       
                09-03-17  CRISIL AA/Stable       
All amounts are in Rs.Cr.
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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