Allahabad Bank Ratings October 06, 2017 Facilities Amount Ratings 1 Rating Action Lower Tier 850.00 CARE Subordinated Tier 1000.00 (Double A, Outlook: ) (Basel I) Reaffirmed Upper Tier 1,000.00 CARE Perpetual 300.00 (Double A minus, Outlook: ) Lower Tier (reduced from 500.00) Withdrawn^ Total 3,150.00 (Rupees Three Thousand One Hundred and Fifty Crore) Details of instruments in Annexure1 ^ On account of repayment CARE has rated the aforesaid Upper Tier and the Perpetual (under Basel ) one notch lower than the Lower Tier in view of their increased sensitiveness to the bank s Capital Adequacy Ratio (CAR), capitalraising ability and profitability during the long tenure of the instruments. The ratings for these hybrid instruments factor in the additional risk arising due to the existence of the lockin clause in these instruments. Any delay in payment of interest/principal (as the case may be) following the invocation of the lockin clause, would constitute an event of default as per CARE s definition of default and as such, these instruments may exhibit a somewhat sharper migration of the rating compared to conventional subordinated debt instruments. Tier under Basel I are characterized by a Point of NonViability (PONV) trigger due to which the investor may suffer a loss of principal. PONV will be determined by the Reserve Bank of India (RBI) and is a point at which the bank may no longer remain a going concern on its own unless appropriate measures are taken to revive its operations, and thus enable it to continue as a going concern. In addition, the difficulties faced by a bank should be such that these are likely to result in financial losses and raising the Common Equity Tier I capital of the bank should be considered as the most appropriate way to prevent the bank from turning nonviable. In CARE s opinion, the parameters considered to assess whether a bank will reach the PONV are similar to the parameters considered to assess the rating of Tier instruments even under Basel. CARE has rated the Tier under Basel I after factoring in the additional feature of PONV. Detailed Rationale & Key Rating Drivers The aforesaid ratings continue to draw strength from the bank s strong parentage support from Government of India (GOI), improvement in advance portfolio mix due to decreasing exposure to corporate credit and high proportion of lowcost deposits and moderation in financial performance in FY17 and Q1FY18. The ratings are tempered by deterioration in asset quality in FY17 & Q1FY18, moderate capitalization levels and liquidity parameters. The bank s ability to shore up its Capital Adequacy Ratio (CAR), improve its profitability and asset quality will remain the key rating sensitivities. Outlook: The negative outlook on rating reflects the expectation of continued stress on asset quality and profitability of the bank. The outlook may be revised to stable in the event of sustained improvement in these parameters. Detailed description of key rating drivers Key rating strengths Strong parentage support of GoI which in turn led to overall satisfactory capitalisation GoI continues to be the major shareholder of AB and its stake increased from 61.37% as on March 31, 2016 to 65.92% as on March 31, 2017 on account of equity infusion of Rs.574.14 crore by GoI and LIC in FY17. Such an infusion of equity has improved the overall CAR of the bank from 11.02% as on March 31, 2016 to 11.45% as on March 31, 2017 which is above the regulatory requirement of 10.25% as on March 31, 2017. Furthermore, in August 2017, the company allotted 5,65,24,678 shares to GOI at an issue price of Rs.73.95 per share (FV being Rs.10) out of share application monies aggregating Rs.418 crore as on March 31, 2017. Post the same, GOI s holding in the bank has increased to 68.32%. 1 CARE Ratings Limited
[ Improving advance portfolio mix due to decreasing exposure to corporate credit Since FY16, AB s concentration of gross advances has shifted from Corporate Credit to Retail Credit, Agricultural credit and credit to MSME. Amongst the retail credit, housing and car loans witnessed a surge. During FY17, the bank s gross advances witnessed a marginal growth of 0.25% (a growth of 3.01% during FY16) which was a result of increase in exposures to customers other than corporate. As on March 31, 2017, % of AB s gross advances to Corporates reduced to 44.70% as against 48.86% and 56.51% as on March 31, 2016 and March 31, 2015 respectively. Sector wise break of AB s gross advances over last three years is summarized here under: As on March 31, 2015 March 31, 2016 March 31, 2017 Sector Amount % Amount % Amount % Corporate Credit 86,508 56.51% 77,050 48.86% 70,678 44.70% Retail Credit 19,549 12.77% 25,894 16.42% 29,168 18.45% Agriculture 24,679 16.12% 26,827 17.01% 27,075 17.12% Micro & Small enterprise 22,359 14.60% 27936 17.71% 31,182 19.72% Total Gross advances 153,095 100% 157,707 100% 158,103 100% In the corporate credit segment, exposure to vulnerable sector (i.e. infrastructure, basic metal & metal products, engineering, textiles, commercial real estate and construction) has also gone down from 31.33% as on March 31, 2016 to 26.85% as on March 31, 2017. Decline in credit deposit ratio albeit increase in CASA deposits AB s portfolio of advances has declined marginally as the same stood at Rs.150,752 crore as on March 31, 2017 as against Rs.152,372 crore as on March 31, 2016. However, total deposits increased marginally to Rs.201,871 crore as on March 31, 2017 as against Rs.200,644 crore as on March 31, 2016. During FY17, the Bank focused on low cost deposits which in turn resulted in a robust YoY growth of 9.59% in CASA deposits during FY17. However, despite the same, the Bank s Credit Deposits ratio decline to 0.75x as on March 31, 2017 (0.79x as on March 31, 2016) which in turn indicates a marginal decline in the overall earning as against the potential. Moderation in financial performance in FY17 and Q1FY18 During FY17, AB s interest income was reported 6.48% lower than FY16. However, during the period, there was an increase in noninterest income levels. During FY17, the company reported a loss of Rs.313 crore as against a loss of Rs.743 crore a year ago. Reduction in losses was a result decrease in provisions by around 14.29% during FY17. Furthermore, during Q1FY18, mainly on the back of decline in operating (Rs.893.09 crore in Q1FY18 as against Rs.978.18 crore during Q1FY17) & interest expenses (Rs.290.52 crore during Q1FY18 and Rs.317.73 crore during Q1FY17), the bank reported a profit of Rs.28.84 crore against a loss of Rs.564.96 crore in the corresponding period of the last fiscal. As a result of the same, bank s Return on Total Assets (ROTA) improved from 0.13% in FY17 (0.32% in FY16) to 0.05% during Q1FY18. During FY17, AB s cost of deposits reduced to 5.94% visàvis 6.64% during FY16. Due to increase in proportion of CASA deposits to 45.79% as on March 31, 2017 as against 36.20% as on March 31, 2017. During the period, AB s total deposits surged to Rs.201,870 crore, thereby registering a marginal YoY growth of 0.61% despite shedding of high cost deposits aggregating to Rs.33,583 crore. As on March 31, 2017, the bank s CAR stood at 11.45% which constitutes Tier I ratio of 8.49% and Tier ratio of 2.96% which was above the regulatory requirement 10.25%. CAR as on June 30, 2016 stood at 11.61%. Key rating weakness Deterioration in asset quality in FY17 & Q1FY18 During FY17, AB s GNPA ratio rose by 333 basis points and stood at 13.09% as against 9.76% during FY16. Furthermore, NNPA stood at 8.91% as against 6.75% during FY16. Furthermore, during Q1FY18, the ratio of NNPA and GNPA stood at 8.95% and 13.85% respectively. AB s portfolio of stressed assets stood at Rs.21399 crore as on March 31, 2017 which is equivalent to 19.11% of the gross advances as on the same date. During FY17, fresh slippages were restricted to Rs.11417 crore as against Rs.12924 crore during FY16. Analytical approach: CARE has considered the standalone business and financial profile of Allahabad Bank along with ownership and expected support from Government of India. Applicable criteria: Criteria on assigning Outlook to Credit Ratings 2 CARE Ratings Limited
CARE s Policy on Default Recognition CARE s Rating Methodology for Banks About the Bank Allahabad Bank (AB), incorporated in 1865, is a Kolkatabased midsized public sector bank. AB manages a deposit and advance base of Rs.2,01,871 crore and Rs.1,50,752 crore through a network of 3,246 branches (one overseas branch at Hong Kong and rest in India). Government of India (GoI) is the major shareholder of AB, holding 65.92% equity stake as on March 31, 2017 (61.37% as on March 31, 2016). Ms. Usha Ananthasubramanian is the MD and she is assisted by Mr. N. K. Sahoo, Executive Director, along with various General Managers heading different departments. Brief Financials FY16 (A) FY17 (A) Total operating income 18,885 17,660 PAT 743 313 Interest coverage (times) Before provisions 1.32 1.31 Interest coverage (times) After provisions 0.91 0.95 Total Assets 233,180 234,437 Net NPA (%) 6.75 8.91 ROTA (%) 0.32 0.13 A: Audited Status of noncooperation with previous CRA: Not applicable Any other information: Not applicable Rating History for last three years: Please refer Annexure2 Note on complexity levels of the rated instrument: CARE has classified instruments rated by it on the basis of complexity. This classification is available at www.careratings.com. Investors/market intermediaries/regulators or others are welcome to write to care@careratings.com for any clarifications. Analyst Contact: Name: Mr. Vineet Chamaria Tel: 0334018 1609 Mobile: 9051730850 Email: vineet.chamaria@careratings.com **For detailed Rationale Report and subscription information, please contact us at www.careratings.com About CARE Ratings: CARE Ratings commenced operations in April 1993 and over two decades, it has established itself as one of the leading credit rating agencies in India. CARE is registered with the Securities and Exchange Board of India (SEBI) and also recognized as an External Credit Assessment Institution (ECAI) by the Reserve Bank of India (RBI). CARE Ratings is proud of its rightful place in the Indian capital market built around investor confidence. CARE Ratings provides the entire spectrum of credit rating that helps the corporates to raise capital for their various requirements and assists the investors to form an informed investment decision based on the credit risk and their own riskreturn expectations. Our rating and grading service offerings leverage our domain and analytical expertise backed by the methodologies congruent with the international best practices. Disclaimer CARE s ratings are opinions on credit quality and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. CARE has based its ratings/outlooks on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Most entities whose bank facilities/instruments are rated by CARE have paid a credit rating fee, based on the amount and type of bank facilities/instruments. In case of partnership/proprietary concerns, the rating /outlook assigned by CARE is based on the capital deployed by the partners/proprietor and the financial strength of the firm at present. The rating/outlook may undergo change in case of withdrawal of capital or the unsecured loans brought in by the partners/proprietor in addition to the financial performance and other relevant factors. 3 CARE Ratings Limited
Annexure1: Details of Instruments/Facilities Name of the Date of Coupon Maturity Size of the Issue Rating assigned along Instrument Issuance Rate Date with Rating Outlook Lower Tier March 26, 2009 9.23% March 26, 2019 400.00 CARE Upper Tier March 19, 2009 9.28% March 19, 2024 500.00 CARE Lower Tier August 04, 2009 8.45% August 04, 2019 450.00 CARE Lower Tier 0.00 Withdrawn Perpetual Perpetual March 30, 2009 9.20% December 18, 2009 9.08% Upper Tier December 18, 2009 8.58% Call option on March 30, 2019 and hence on each anniversary Call option on December 18, 2019 and hence on each anniversary December 18, 2019 150.00 CARE 150.00 CARE 500.00 CARE Tier January 25, 2017 8.15% January 25, 2027 1000.00 CARE Annexure2: Rating History of last three years Name of the Sr. Instrument/Bank No. Facilities Type Current Ratings Amount Outstanding Rating 20172018 Rating history 2016 2017 20152016 20142015 1. Lower Tier CARE LT 400.00 (16Dec16) (26Sep16) AA AA (22Sep15) (15Dec14) 2. Upper Tier CARE LT 500.00 (16Dec16) (26Sep16) AA AA (22Sep15) (15Dec14) 3. Lower Tier CARE LT 450.00 (16Dec16) (26Sep16) AA AA (22Sep15) (15Dec14) AA AA 4. Lower Tier LT 1)Withdrawn (26Sep16) (22Sep15) (15Dec14) 5. Lower Tier LT 1)Withdrawn (16Dec16) (26Sep16) AA AA (22Sep15) (15Dec14) 4 CARE Ratings Limited
Name of the Sr. Instrument/Bank No. Facilities Type Current Ratings Amount Outstanding Rating 20172018 Rating history 2016 2017 20152016 20142015 6. Lower Tier LT (16Dec16) (26Sep16) AA AA (22Sep15) (15Dec14) 7. Perpetual CARE LT 150.00 (16Dec16) (26Sep16) AA AA (22Sep15) (15Dec14) 8. Perpetual CARE LT 150.00 (16Dec16) (26Sep16) AA AA (22Sep15) (15Dec14) 9. Upper Tier CARE LT 500.00 (16Dec16) (26Sep16) AA AA (22Sep15) (15Dec14) Tier 10. CARE LT 1000.00 (16Dec16) (26Sep16) 5 CARE Ratings Limited
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