Oriental Bank of Commerce February 06, 2018 Ratings Facilities Basel III Compliant Additional Tier I Bonds Details of instruments/facilities in Annexure-1 Amount (Rs. crore) 2000 (Rupees two thousand crore only) Rating 1 CARE A (Single A) (Under Credit Watch with Developing Rating Action Placed on Credit Watch Implications CARE has rated the aforesaid Basel III Compliant Tier-I Perpetual Bonds after taking into consideration its key features as below: The bank has full discretion at all times to cancel coupon payments. The coupon is to be paid out of current year profits. However, if the current year s profits are not sufficient, coupon payment may be paid subject to availability of i. Profits brought forward from previous years, and/or ii. Reserves representing appropriation of net profits, including statutory reserves, and excluding share premium, revaluation reserve, foreign currency translation reserve, investment reserve and reserves created on amalgamation. The accumulated losses and deferred revenue expenditure, if any, shall be netted off from (i) and (ii) to arrive at the available balances for payment of coupon. However, payment of coupons on PDIs from the reserves is subject to the issuing bank meeting minimum regulatory requirements for CET1, Tier 1 and Total Capital ratios including the additional capital requirements for Domestic Systemically Important Banks at all times and subject to the restrictions under the capital buffer frameworks The instrument may be written-down upon CET I breaching the pre-specified trigger of 5.5% before March 31, 2019, and 6.125% on and after March 31, 2019, or written-off on occurrence of trigger event called point of non-viability (PONV). The PONV trigger shall be determined by RBI Any delay in the payment of interest/principal (as the case may be) due to invocation of any of the features mentioned above would constitute as 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 with the conventional subordinated debt instruments. Detailed Rationale & Key Rating Drivers The rating continues to derive strength from the majority ownership by Government of India (GoI) and demonstrated strong support by GoI including periodical capital infusions in the past. GoI has allocated equity capital infusion of Rs3,571 crore during FY18. The rating also factors in the long standing track record of operations of the bank and its good resources profile. Weak asset quality, moderate capital adequacy and significant weakness in profitability profile remain key rating constraints. Going forward continued ownership and support from GoI and the bank s ability to improve its asset quality and profitability would be the key rating sensitivities. The rating assigned to the Basel III Compliant Additional Tier I Bonds has been placed on Credit Watch Implications as the bank OBC s Common Equity Tier I (CET 1) capital ratio dropped to 5.56% as on December 31, 2017 vs. regulatory minimum requirement of 6.75% (as on Mar-17), a critical feature of the terms of Basel III compliant Additional Tier I (ATI) perpetual bond issue. The lower capital adequacy has been on account of high credit provisioning following weakness in asset quality profile resulting in substantial loss of Rs.1,985 crore in Q3FY18 and net loss of Rs.4,222 crore in 9MFY18. However, the Government of India (GoI) has allocated equity capital infusion of Rs.3,571 crore during FY18 which will improve bank s CET 1 level The bank is in discussions with Reserve Bank of India (RBI) on resolving the above 1 Complete definition of the ratings assigned are available at www.careratings.com and other CARE publications 1 CARE Ratings Limited
issue and clarity on the same is yet to emerge. CARE will closely follow the developments in this regard and will consider taking appropriate rating action in due course. Detailed description of the key rating drivers Key Rating Strengths Majority ownership of GoI and long track record: Government of India is the major shareholder in OBC with a stake of 58.38% stake as on December 31, 2017. The rating factors in the support that the bank is expected to get from GoI. GoI has allocated capital infusion of Rs. 3,571 crore in the bank in FY18. OBC is a nationalized bank of significant size which has a long track record of operations of over 70 years with a pan India network. Comfortable resources profile: OBC enjoys healthy resources profile, its total deposits grew by 2.69% yoy to Rs. 2,16,327 crore as on December 31, 2017. Deposits comprised CASA deposits of 29.3% and retail term deposits (retail term deposits of below Rs. 1 crore) of 44% of total deposits as on December 31, 2017. As on March 31, 2017, total borrowed funds stood at Rs. 2,33,932 crore with deposits accounting for 93.8% (PY: 95.4%) of total borrowed funds. Key Rating Weaknesses Stressed asset quality parameters: OBC s asset quality witnessed further deterioration during 9MFY18, the total fresh NPA slippages remained elevated at Rs.9,306 crore during 9M, FY18 (Rs. 8,309 crore during 9MFY17). The elevated NPA generation has resulted in deterioration in the asset quality parameters as witnessed by Gross NPA ratio of 16.95% as on December 31, 2017 as against Gross NPA ratio of 13.73% as on March 31, 2017. The Net NPA ratio deteriorated to 9.52% as on December 31, 2017 (8.96% as on March 31, 2017). Furthermore, net NPAs as a percentage of tangible net worth stood at 156% as on December 31, 2017, compared with 111% as on March 31, 2017. Weakness in capitalization profile, sizeable capital infusion from GoI in FY18 is likely to provide cushion: OBC has reported net loss of Rs. 1,985 crore in Q3, FY18 and Rs. 4,222 crore in 9M, FY18 primarily on account of high credit provisioning. As a result of sizeable net loss, OBC s Common Equity Tier I (CET 1) capital ratio dropped to 5.56% vs. regulatory minimum requirement of 6.75% (as on Mar-17). GoI has allocated capital infusion of Rs. 3,571 crore in the bank in FY18 which is likely to support bank s capitalization profile. OBC s Tier 1 capital and CRAR was 7.56% and 10.37% respectively as on December 31, 2017 vs. regulatory minimum requirement of 8.25% and 10.25% (as on Mar-17). Deterioration in earnings profile: During 9M, FY18, OBC s net interest income decreased by 5.2% y-o-y to Rs.3,416 crore, however, partly offset by 4.1% increase in non-interest income, its the total income declined by 4.2% to Rs.15,415 crore. The bank reported operating profit of Rs.3,302 crore during 9M, FY18 as compared to Rs.3,153 crore for 9M, FY17. Despite increase in operating profit, the significant increase in provisioning to Rs. 7463 crore during 9M, FY18 as against Rs.2,852 crore during 9M, FY17 resulted the bank reporting net loss of Rs.4,222 crore during 9M, FY18 as against a PAT of Rs.124 crore during 9M, FY17. Analytical approach: Standalone Applicable Criteria Criteria on assigning Outlook to Credit Ratings Criteria for placing rating on Credit Watch CARE s Policy on Default Recognition Bank - CARE s Rating Methodology For Banks Financial Sector Financial Ratios About the Company OBC was established in Lahore on February 19, 1943, by Late Rai Bahadur Lala Sohan Lal, the first Chairman of the Bank. The registered office of the Bank was shifted to Delhi in 1950. The Bank was nationalized on April 15, 1980 and became a public sector bank. The majority stakeholder of OBC is Government of India (GoI), which held 58.38% stake in the bank as on December 31, 2017. As on December 31, 2017, the Bank operated through a network of 2,381 branches and 2,630 2 CARE Ratings Limited
ATMs across India. As on March 31, 2017, the bank had 21,552 employees (PY: 21,827). The operations of the bank are managed by experienced team headed by Mr. Mukesh Kumar Jain, CEO and MD who was appointed in July 2017. Brief Financials (Rs. crore) FY16 (A) FY17 (A) Total income 21,935 21,188 PAT 156-1,094 Total Assets 2,38,261 2,51,616 Net NPA (%) 6.70 8.96 ROTA (%) 0.07-0.45 A: Audited Status of non-cooperation with previous CRA: Not applicable Any other information: Not applicable Rating History for last three years: Please refer Annexure-2 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 Gaurav Dixit Tel: 011 4533 3235 Mobile: +91 97170 70079 Email: gaurav.dixit@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 risk-return 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
Annexure-1: Details of Instruments/Facilities ISIN Instrument Date of Issuance Size of the Issue (Rs. Cr) Coupon Rate INE141A08027 Basel III - AT I Bonds 10-Feb-15 500 9.48% INE141A08068 Basel III - AT I Bonds 30-Sep-16 500 10.95% Maturity Date Perpetual; Call option 10-Feb- 2020 Perpetual; Call option 30-Sep- 2021 Rating assigned along with Rating Outlook CARE A; (Under Credit Watch CARE A; (Under Credit Watch INE141A08076 Basel III - AT I Bonds 02-Nov-17 1000 10.25% Perpetual; Call option starting 02.11.2022 CARE A; (Under Credit Watch Total 2000 4 CARE Ratings Limited
Annexure-2: Rating History of last three years Sr. No. Name of the Instrument/Bank Facilities Type Current Ratings Amount Outstanding (Rs. crore) Rating 2017-2018 Rating history 2016-2017 1. Bonds-Lower Tier II LT - - - 1)Withdrawn 2. Bonds-Upper Tier II LT - - - 1)Withdrawn 3. Bonds-Lower Tier II LT - - 1)Withdrawn 4. Bonds-Upper Tier II LT 500.00 CARE A+; 5. Bonds-Perpetual Bonds - LT - - - 1)Withdrawn - 2015-2016 2014-2015 + + 6. Bonds-Perpetual Bonds 7. Bonds-Perpetual Bonds LT 300.00 CARE A+; LT 300.00 CARE A+; 8. Bonds-Lower Tier II LT 300.00 CARE AA-; 9. Bonds-Upper Tier II LT 200.00 CARE A+; - - - + 10. Bonds-Lower Tier II LT 725.00 CARE AA-; 5 CARE Ratings Limited
11. Bonds-Tier II Bonds LT 1000.00 CARE AA-; 12. Bonds-Tier I Bonds LT 1000.00 CARE A (Under 13. Bonds-Tier II Bonds LT 1000.00 CARE AA-; 14. Bonds-Tier II Bonds LT 1000.00 CARE AA-; 15. Bonds-Tier I Bonds LT 1000.00 CARE A (Under 1)CARE A; Credit watch with Developing 1)CARE A; Credit watch with Developing 2)CARE A+ (30-Sep-16) 3)CARE A+ 3)CARE AA (23-Jun-16) + + 1)CARE A+ 1)CARE AA- (21-Mar-16) (13-Jan-15) - 1)CARE AA (21-Mar-16) + - - - - - - 6 CARE Ratings Limited
CONTACT Head Office Mumbai Ms. Meenal Sikchi Mr. Ankur Sachdeva Cell: + 91 98190 09839 Cell: + 91 98196 98985 E-mail: meenal.sikchi@careratings.com E-mail: ankur.sachdeva@careratings.com Ms. Rashmi Narvankar Mr. Saikat Roy Cell: + 91 99675 70636 Cell: + 91 98209 98779 E-mail: rashmi.narvankar@careratings.com E-mail: saikat.roy@careratings.com CARE Ratings Limited (Formerly known as Credit Analysis & Research Ltd.) Corporate Office: 4th Floor, Godrej Coliseum, Somaiya Hospital Road, Off Eastern Express Highway, Sion (East), Mumbai - 400 022 Tel: +91-22-6754 3456 Fax: +91-22-6754 3457 E-mail: care@careratings.com AHMEDABAD Mr. Deepak Prajapati 32, Titanium, Prahaladnagar Corporate Road, Satellite, Ahmedabad - 380 015 Cell: +91-9099028864 Tel: +91-79-4026 5656 E-mail: deepak.prajapati@careratings.com BENGALURU Mr. V Pradeep Kumar Unit No. 1101-1102, 11th Floor, Prestige Meridian II, No. 30, M.G. Road, Bangalore - 560 001. Cell: +91 98407 54521 Tel: +91-80-4115 0445, 4165 4529 Email: pradeep.kumar@careratings.com CHANDIGARH Mr. Anand Jha SCF No. 54-55, First Floor, Phase 11, Sector 65, Mohali - 160062 Chandigarh Cell: +91 85111-53511/99251-42264 Tel: +91-0172-490-4000/01 Email: anand.jha@careratings.com CHENNAI Mr. V Pradeep Kumar Unit No. O-509/C, Spencer Plaza, 5th Floor, No. 769, Anna Salai, Chennai - 600 002. Cell: +91 98407 54521 Tel: +91-44-2849 7812 / 0811 Email: pradeep.kumar@careratings.com COIMBATORE Mr. V Pradeep Kumar T-3, 3rd Floor, Manchester Square Puliakulam Road, Coimbatore - 641 037. Tel: +91-422-4332399 / 4502399 Email: pradeep.kumar@careratings.com HYDERABAD Mr. Ramesh Bob 401, Ashoka Scintilla, 3-6-502, Himayat Nagar, Hyderabad - 500 029. Cell : + 91 90520 00521 Tel: +91-40-4010 2030 E-mail: ramesh.bob@careratings.com JAIPUR Mr. Nikhil Soni 304, Pashupati Akshat Heights, Plot No. D-91, Madho Singh Road, Near Collectorate Circle, Bani Park, Jaipur - 302 016. Cell: +91 95490 33222 Tel: +91-141-402 0213 / 14 E-mail: nikhil.soni@careratings.com KOLKATA Ms. Priti Agarwal 3rd Floor, Prasad Chambers, (Shagun Mall Bldg.) 10A, Shakespeare Sarani, Kolkata - 700 071. Cell: +91-98319 67110 Tel: +91-33- 4018 1600 E-mail: priti.agarwal@careratings.com NEW DELHI Ms. Swati Agrawal 13th Floor, E-1 Block, Videocon Tower, Jhandewalan Extension, New Delhi - 110 055. Cell: +91-98117 45677 Tel: +91-11-4533 3200 E-mail: swati.agrawal@careratings.com PUNE Mr.Pratim Banerjee 9th Floor, Pride Kumar Senate, Plot No. 970, Bhamburda, Senapati Bapat Road, Shivaji Nagar, Pune - 411 015. Cell: +91-98361 07331 Tel: +91-20- 4000 9000 E-mail: pratim.banerjee@careratings.com CIN - L67190MH1993PLC071691 7 CARE Ratings Limited