in Rs. crore
Lower Tier-II Bonds Programmes
[ICRA]A+; Reaffirmed; Outlook revised from stable to Negative
Upper Tier-II Bonds Programmes
[ICRA]A; Reaffirmed; Outlook revised from stable to Negative
Perpetual Bonds Programmes
Certificate of Deposit Programme
ICRA has reaffirmed the ratings outstanding on the Rs. 2,640.00 crore Basel II compliant Lower Tier-II Bonds Programme of Indian Overseas Bank (IOB/”the bank”) at [ICRA]A+ (Pronounced ICRA A plus). ICRA has also reaffirmed the rating outstanding on the Rs. 2,632.30 crore Basel II compliant Upper Tier-II Bonds Programme and Rs. 780.00 crore Basel II compliant Perpetual Bond Programmes at [ICRA]A (Pronounced ICRA A). The outlook on the long term rating is revised from Stable to Negative. ICRA has reaffirmed the [ICRA]A1+(pronounced ICRA A one plus) rating to the Rs. 15,000.00 crore certificate of deposit programmes of IOB.
The revision in the outlook is on account of continued deterioration in IOB’s key asset quality indicators over the recent past, which further impacted the profitability and the solvency profile of the bank during Q3FY2016 .ICRA also takes note of the limited visibility on capital availability to fully support credit growth while meeting regulatory minimum requirement. The ratings continue to draw comfort from IOB’s majority sovereign ownership (81% equity shares are held by Government of India or GoI as on December 31, 2015) and, the bank’s established franchise imparting healthy and stable deposits base thus providing a favourable view on the liquidity profile.
The Gross NPA% of the bank increased to 12.6% as on December 2015 (8.3% in March 2015) as compared to 5.0% as in March 2014 following the asset quality review by RBI to bring consistency in NPA recognition for stressed accounts in the banking sector. ICRA takes note of the higher than anticipated stress, slower than expected pace of recovery and weak outlook for several credit intensive sectors. IOB’s exposure to iron & steel and power is relatively high at around 17% of their domestic loan book as in September 2015 and, its Gross NPA plus standard restructured advances are relatively high at around 20% , which could lead to elevated fresh NPA generation rate and make recoveries more challenging over next 1-2 years.
Additionally, sizeable Net NPAs (8.32% as on December 31, 2015) and other weak assets are likely to keep credit costs elevated over next 2-3 years, leading to pressure on earnings and therefore internal capital generation. Furthermore, requirement to increase provisioning cover for some restructured advances could elevate credit cost further in FY2017.The bank’s high credit cost (credit provisions in relation to ATA of around 1.9% in 9MFY2016) leading to weak net profitability (PAT/ATA of -0.9% in 9MFY2016); the bank reported a net loss of Rs.1961 crore during nine month ended FY2016. IOB’s profitability is expected to remain under pressure over the next 2-3 years as credit cost is expected to remain at elevated levels.
IOB’s Tier I capital and CRAR was low at 7.2% and 9.7% respectively as on December 31, 2015as against regulatory minimum requirement of 7.625% and 9.625% respectively as on March 31, 2016 . Further, IOB’s Net NPAs in relation to networth have increased to 110% as on December 2015 from 70% as on March 2015, considerably weakening the ability of the bank to withstand unexpected losses.
In view of the above, the bank would have to restrict advances growth in the near term and secure core capital in case of lack of adequate investor appetite for the Additional Tier-1 (AT1) bond issuance by the bank. In ICRA’s estimate, IOB’s common equity requirement is equivalent to 1.5-2.0 times of its current market capitalization and it would require about Rs. 3,200-3,500 crore of additional tier I capital going forward. In case of lack of adequate investor appetite for AT1 capital raising, the gap would need to be met through further core capital raising, thereby increasing core capital requirements further to 2.2-2.6 times of the bank’s market capitalisation. As for capital raising in current fiscal, GoI infused equity capital of Rs 2,000 crore in IOB in current fiscal. Continued equity support from GOI would continue to remain a key driver for IOB’s credit profile.
With ~ 81% ownership by the Government of India (GoI), IOB is one of the large commercial banks in the country, with an asset base (net of revaluation reserve) of Rs 2.8 lakh crore as of March, 2015 and a network of 3,381 domestic branches. Headquartered in Chennai, IOB also has an overseas presence through its 8 foreign branches, 3 representative offices, and 2 remittance centres. IOB registered a decline of about 1% in its Gross advances during FY2015 to Rs.1,79,041 crore as in March 2015 as compared to Rs.1,81,081 crore in March 2014. IOB has a moderate deposit profile with CASA at 26.1% in September 2015.
For the year ended March 31, 2015, IOB reported a net loss of Rs. 454 crore on a total Asset base of Rs. 2,83.930 crore as compared to net profit of Rs. 601 crore and Rs. 2,73,091 crore respectively during FY2014.
For the nine months ended December30, 2015, IOB reported a net loss of Rs.1961 crore as compared to net loss of Rs. 490 crore in the corresponding period of the previous financial year. IOB’s asset quality deteriorated during the current financial year with its gross NPA percentage at 12.64% as in December 2015. The capital adequacy ratio as per Basel III norms stood at 9.7% as in December 2015.
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