Rating Rationale
December 20, 2019 | Mumbai
Oriental Bank of Commerce
FD rating placed on 'Watch Positive'
 
Rating Action
Fixed Deposits Programme FAA+ (Placed on 'Rating Watch with Positive Implications')
Rs.35000 Crore Certificate of Deposits CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has placed its rating on the fixed deposits programme of Oriental Bank of Commerce (OBC) on 'Rating Watch with Positive Implications' and reaffirmed its 'CRISIL A1+' rating on the certificate of deposits programme.

On August 30, 2019, the ministry of finance announced a set of reforms for public sector banks (PSBs) including consolidation, capital infusion, and measures to enhance governance standards. A key announcement was also the amalgamation of 6 PSBs into 4 anchor PSBs. As part of this announcement, it was proposed to amalgamate Punjab National Bank (PNB) with OBC and United Bank of India (UBI). In response to the announcement, CRISIL had published a credit bulletin on September 5, 2019, conveying that it will continue to closely monitor developments and engage with various stakeholders, and take appropriate rating action thereafter.

In September 2019, in-principle approval from the boards of directors of all the three merging banks was received. Later, in November 2019, alternative mechanism accorded its in-principal approval for the merger of PNB, OBC, and UBI. Furthermore, CRISIL has had discussions with several of the amalgamating banks and understands that the integration process in terms of branch rationalisation, alignment of policies, processes and products, and joint training of staff is already underway. The merger is expected to be completed after receipt of all regulatory approvals. CRISIL will resolve the rating watch once clarity emerges on the merger completion.
 
The ratings on the debt instruments of OBC have now been placed on 'Watch with Positive Implications' as there has been significant progress on the amalgamation. CRISIL expects that the credit risk profile of the merged entity will be better than that of OBC currently. CRISIL will resolve the rating watch once clarity emerges on the merged entity's business and financial risk profiles. CRISIL will monitor for potential integration challenges and any impact on the earnings profile of the merged entity. The asset quality of the merged entity will also be a monitorable.

In terms of pro-forma merged financials, the merged bank would have total assets of Rs 12.2 lakh crore, with gross non-performing assets (NPAs) of 15.7% as on September 30, 2019. Common equity tier I, Tier I, and overall capital adequacy ratio (CAR) were 11.1%, 12.0%, and 14.1%, respectively, as on September 30, 2019. On the business side, there are potential synergies stemming from a larger distribution network with deeper penetration in key states and operational efficiencies. The branch network strength of PNB and UBI will complement each other and the merged bank will have significant presence in the North and East India. However, there could be some overlap in the branches of OBC in the North region.

Till the amalgamation is completed, the ratings on the debt instruments of OBC continue to reflect the strong expectation of support from majority owner, the Government of India. The strength is partially offset by the bank's weak asset quality and modest earnings.

Analytical Approach

For arriving at its ratings, CRISIL has considered the standalone business and financial risk profiles of OBC, and factored in the support it is likely to receive from the government. This is because government is both the majority shareholder in PSBs and the guardian of India's financial system.

Key Rating Drivers & Detailed Description
Strength
* Strong expectation of support from the government
The rating continues to factor in the expected strong government support, both on an ongoing basis and in the event of distress. 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 the government to support PSBs, including OBC. Government infused Rs 6,686 crore in the bank in fiscal 2019 (Rs 3,571 in fiscal 2018), which improved the bank's tier-1 and overall CAR (under Basel III) to 11.2% and 14.0%, respectively, as on September 30, 2019, from 7.3% and 10.4%, respectively, as on September 30, 2018.

Weaknesses
* Average asset quality
Despite improving, asset quality remains weak. Gross NPAs declined marginally to 12.5% as on September 30, 2019, from 12.7% as on March 31, 2019. Slippages stood at 3.5% (annualised) for the half-year ended September 2019, and are primarily from the bank's large corporate exposure to vulnerable sectors such as iron and steel, infrastructure, and construction. The bank has increased its focus on recoveries (including through the Insolvency and Bankruptcy Code route) and resolving asset quality challenges. Though asset quality is expected to improve gradually over the medium term, ability to arrest slippages and improve recovery will remain a key rating monitorable.
 
* Modest earnings
Earnings will remain subdued over the medium term because of high provisioning cost. The bank reported a profit after tax (PAT) of Rs 238.6 crore for the half-year ended September 30, 2019, compared with a loss of Rs 291.5 crore for the corresponding period previous fiscal on account of higher provisions (PAT of Rs 55 crore in fiscal 2019). Credit cost stood at 1.4% (annualised) for the half-year ended September 30, 2019 (2.2% for the corresponding period previous fiscal) and is expected to remain high over the next few quarters, given the increasing provisioning requirement for stressed assets.
 
The provisioning coverage ratio (excluding technical write-offs) increased to 56% as on September 30, 2019, from 46% as on September 30, 2018 (57% as on March 31, 2019).
 
Ability to arrest deterioration in asset quality, the resultant provisioning cost, and its impact on profitability will remain key rating monitorables over the medium term.
Liquidity Superior

Liquidity is supported by a sizeable retail deposit base that forms a significant part of the total deposits. Liquidity coverage ratio was 125% as on September 30, 2019, against the regulatory requirement of 100%. The excess statutory liquidity was Rs 5374.24 crore (2.29%) 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, access to the call money market, and refinance limits from sources such as National Housing Bank and National Bank for Agriculture and Rural Development.

Rating sensitivity factors
Upward factors
* Improvement in asset quality and profitability on a sustained basis with the bank reporting return on assets of over 1.5% on a steady state basis
* Capitalisation metrics improving considerably with significant cushion over the regulatory requirements

Downward factors
* Higher-than-expected deterioration in asset quality with GNPA increasing beyond current levels
* Decline in capital adequacy ratios (including CCB) with CET I remaining below 9.5% and overall CAR below 12.5% on sustained basis.

About the Bank

Founded in February 1943, OBC is a medium-sized PSB with assets aggregating Rs 262,981 crore and a network of 2,371 branches as on September 30, 2019. With deposits of Rs 225,202 crore and gross advances of Rs 164,207 crore, the bank had a market share of 1.74% in deposits and 1.68% in advances in the banking system, as on this date. The bank was placed under the Reserve Bank of India's prompt corrective action in October 2017.
 
For fiscal 2019, the bank reported a PAT of Rs 55 crore and total income (net of interest) of Rs 8,167 crore, against a net loss of Rs 5,872 crore in the previous fiscal. For the half-year ended September 2019, PAT was Rs 239 crore and total income (net of interest) Rs 4,367 crore, against a net loss of Rs 291 crore and total income (net of interest) of Rs 3,751 crore in the corresponding period of the previous fiscal.

Key Financial Indicators
As on/for the half year ended Sep 30 Unit 2019 2018
Total assets Rs crore 262981 237943
Total income (net of interest) Rs crore 4367 3751
Reported PAT Rs crore 239 -291
Gross NPA % 12.5 17.2
Overall capital adequacy ratio % 14.0 10.4
Return on assets % 0.2 -0.3

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)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs.Cr) Rating assigned with outlook
NA Fixed deposit programme NA NA NA NA FAA+/Watch Positive
NA Certificates of deposit Programme NA NA 7-365 days 35000 CRISIL A1+
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  35000.00  CRISIL A1+  05-09-19  CRISIL A1+  25-01-18  CRISIL A1+  31-08-17  CRISIL A1+  10-03-16  CRISIL A1+  CRISIL A1+ 
        31-01-19  CRISIL A1+      31-03-17  CRISIL A1+       
Fixed Deposits  FD  0.00  FAA+/(Watch) Positive  05-09-19  FAA+/Stable  25-01-18  FAA+/Stable  31-08-17  FAA+/Negative  10-03-16  FAAA/Negative  FAAA/Stable 
        31-01-19  FAA+/Stable      31-03-17  FAA+/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
Criteria for Notching up Stand Alone Ratings of Entities Based on Government Support

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