Rating Rationale

Strength
*Adequate capital position
SIB's capital position is adequate in relation to its scale of business, reflected in its Tier-I capital adequacy ratio (CAR) having remained above 9% and overall CAR above 11%, over the five years through fiscal 2019. On September 30, 2019, the bank reported a networth of Rs 5,547 crore with tier I and overall CAR of 9.6% and 12.1%, respectively. Networth coverage of net NPAs for the bank however, has declined over the last few quarters and stood at 2.5 times on September 30, 2019 as compared to 4.0 times, a year ago. While the capital position of the bank is expected to remain adequate over the medium term in a steady state scenario, its ability to curtail asset quality challenges would be crucial so as to prevent any potential erosion of networth. Further, incremental capital would be required by the bank to grow at a robust rate.

Weaknesses
*Average asset quality
SIB's asset quality has moderated over the last few fiscals owing to increased slippages in the corporate book; gross non-performing assets (GNPAs) stood at 4.92% on September 30, 2019. During fiscal 2019, slippages - though declined in comparison to that for fiscal 2018 - remained high 3.4% (1.5% for the first quarter of fiscal 2020) accredited to continued slippages in the large corporate segment, this segment constitutes 31% of the total advances as on September 30, 2019. However, given the bank's increased focus on recovery and upgradations, the overall deductions in NPAs have remained stable and should sustain at current levels. While most of the stressed accounts were recognized as of September 30, 2019, slippages for 2020 are expected to be slightly high on account of incremental stress in a few exposures to the infrastructure sector and in some financial sector corporate accounts that are presently in SMA (SMA 2 book remained high at 3% as on June 30, 2019 though reduced from 4.2% as of September 30 2018). Post Kerala floods in August 2018, performance of Rs 289 crore of loans that were restructured as per RBI Circular of 2016, has been almost regular and the moratorium period for it would end in December 2019. More recently, after the floods in Kerala ' the bank is not expected to have had a material increase in slippages as exposure to impacted districts were low.

*Average earnings
SIB's profitability has remained subdued over the last 4-5 fiscals owing to increased provisioning requirements. While pre-provisioning profitability has remained stable with sustenance of NIMs at ~2.4% and other income ranging from 0.7%-1.0% over the years, overall profitability has moderated due to increase in credit costs. RoA for fiscal 2019 stood at 0.3% as compared to 0.4% for the previous fiscal. Going forward, the bank's operating profitability should sustain supported by its steady NIIs and fee income however, the proportion of income from treasury may remain to be moderate on account of unfavorable market condition. Provisioning requirement is expected to remain elevated and would increase from the current PCR level of ~30% which, the bank intends to increase to >40% in the long term. Slippages are expected to continue at the present rate for the next few quarters thereby necessitating additional provisions.

*Average resource profile
SIB has an average resource profile with a deposit base of Rs 82,947 crore on September 30, 2019, marked by a lower-than-industry-average proportion of current account and savings account (CASA) deposits of 24.9%. Consequently, the cost of funds is higher than industry average at 6.2% for fiscal 2019, though it is comparable with peers. However, on the positive side, the bank has a stable base of NRI deposits that formed 27.3% of total deposits as on September 30, 2019. In addition, the share of retail deposits (retail term deposits and savings banks deposits) continues to be high and has been between 70-80% during the past few years, thereby extending stability to the bank's resources profile. Nevertheless, improving the share of CASA would continue to be a key factor in improving overall deposit profile of SIB.

*Small scale of operations with geographic concentration
SIB's market position remains constrained by its position as a mid-sized bank with concentration of operations in and around Kerala. With advances of Rs 63,920 crore on September 30, 2019, the bank had a small market share of 0.5%. In addition, its business has remained concentrated in Kerala to the extent if 41.3% (of total advances) as on September 30, 2019, although it has an established position in the state. Modest scale and regional concentration of operations result in SIB's business risk profile remaining susceptible to local regulatory and economic environment and other calamities occurrences like Kerala Floods.

Liquidity: Adequate
SIB runs a fairly conservative ALM profile with negative mismatches manageable by liquidity provisions like excess SLR, refinances from various institutions like RBI, NABARD, NHB and call money. Cash flows of the next one month ' current and next fortnight is estimated and tracked closely by the Treasury department. As of June 2019, the largest chunk of term deposits (~68%) outstanding was due for maturity only after 1 year ' in the 1-3 year bucket. As on September 30, 2019, the bank had an LCR of 200.36%. In addition, the liquidty position is supported by the bank's access to systemic liquidity.

Rating Sensitivity Factors
Downward factor
* Significant deterioration in asset quality evidenced by GNPAs increasing to beyond 6%.
* Weakening in capital position and/or profitability.