Instruments |
Amount
(Rs. crore)[1] |
Rating Action
(December 2016) |
| Additional Tier-I Bonds Programme – Basel III |
600 |
[ICRA]AA+(hyb)(stable); assigned |
ICRA has assigned a [ICRA]AA+ (hyb) (pronounced ICRA double A plus hybrid) rating with a stable outlook to the Rs. 600 crore Basel III compliant additional tier-I bond programme of State Bank of Travancore (SBT)[2]. ICRA also has a rating outstanding of [ICRA]AAA (pronounced ICRA triple A) with stable outlook for its Rs. 250 crore lower tier-II bond programme.
The letters “hyb” in parenthesis suffixed to a rating symbol stand for “hybrid”, indicating that the rated instrument is a hybrid subordinated instrument with equity-like loss-absorption features; such features may translate into higher levels of rating transition and loss-severity vis-à-vis conventional debt instruments.
The rating for the bank’s Basel III compliant tier-I bonds is lower than the Basel III compliant tier-II bonds as these instruments have the following loss absorption features that make them riskier:
- The bank has full discretion at all times to cancel the distribution or payments and the cancellation shall not be an event of default
- The minimum capital conservation ratio applicable to commercial banks may restrict the bank from servicing these tier-I bonds in case the common equity tier-I falls below the limit prescribed by the RBI
These tier-I bonds are expected to absorb losses through the write-down mechanism at the objective pre-specified trigger point fixed at the bank’s common equity tier-I ratio, as prescribed by the RBI. The ratio is 5.5% till March 2019 and thereafter 6.125% of the total risk weighted assets of the bank or when the point of non-viability (PONV) trigger is breached in the RBI’s opinion.
SBT’s Basel III compliant tier-I bond rating, which is one notch lower than the lower tier-II bonds rating, is because of the strong parentage (79% stake held by State Bank of India (SBI); rated [ICRA]AAA(stable)/[ICRA]A1+). ICRA has done higher notch down for Basel III compliant tier-I bond ratings of other public sector banks. The rating takes cognizance of SBI’s strong market positioning, comfortable capital structure and adequate profitability.
The assigned rating also factors in the operational and management synergies with its parent and its well-established franchise in its area of operations (primarily Kerala) supported by the State Bank brand. ICRA takes note of the Union Cabinet’s approval to merge the five SBI associate banks with its parent; the merger process is expected to be completed in the near term and the same would be a key rating monitorable.
SBT’s gross NPAs stood high at 11.6% as on September 30, 2016 (3.8% as on September 30, 2015) on account of alignment of the bank’s asset recognition and provisioning norms in-line with SBI’s during H1FY2017 to facilitate the merger process. During H1FY2017, higher credit provisioning[3] of 3.5% (1.2% for FY2016) resulted in net losses of -2.3% of average total assets (0.3% for FY2016). Consequently, the bank’s capitalisation profile was impacted with tier-I capital and CET-I moderating from 9.2% and 8.9% respectively as on March 31, 2016 to 7.8% and 7.5% respectively as on September 30, 2016.
As on September 30, 2016, the bank‘s total standard restructured assets (excluding state discoms) along with strategic debt restructured, 5/25 accounts and S4A restructured assets stood at 5.6%, indicating further stress in its exposures. The anticipated incremental slippages along with the ageing of existing NPAs would result in higher provisioning requirement for H2FY2017 and thereby continue to exert pressure on the bank’s profitability and capitalisation profile in H2FY2017. While the bank has not raised any equity capital so far during the current fiscal, it proposes to raise additional tier-I capital of Rs. 600 crore from SBI, which would support its near term capitalisation profile. The rating takes comfort from the bank’s distributable reserve[4] of Rs. 2,582 crore as on March 31, 2016. ICRA expects SBI to provide timely capital support to SBT until the proposed merger is completed.
During H1FY2017, the bank’s gross advances declined by 3.8% (annualized) to Rs. 0.68 lakh crore due to the muted credit off-take, especially in the corporate segment; however, during H1FY2017, the bank’s total deposits increased by 6.1% (annualized) to Rs. 1.04 lakh crore with the proportion of CASA deposits improving from 31.8% to 32.5%. The bank’s operations are concentrated in Kerala, which had 72% of its total branches as on March 31, 2016.
Bank Profile
SBT is part of the SBI group and is 79% owned by SBI as on September 30, 2016. Being an SBI associate, SBT derives significant advantage from its use of the State Bank brand name and logo, its access to the group’s extensive branch and ATM network, and sharing of credit-risk rating, treasury management, and IT systems with the parent. The operational synergies between SBT and SBI are high with the two entities using the same core banking solution and SBT distributing the parent’s insurance and mutual funds products. In June 2016, the Union Cabinet approved the merger of the five SBI associate banks with the parent; the merger process is expected to be completed by March 2017.
Recent Results
During H1FY2017, SBT reported a net loss of Rs. 1,331 crore on a total asset base of Rs. 1.16 lakh crore as compared with a net profit of Rs. 184 crore on a total asset base of Rs. 1.10 crore during H1FY2016.
During FY2016, SBT reported a net profit of Rs. 338 crore on a total asset base of Rs. 1.15 lakh crore as compared with a net profit of Rs. 336 crore on a total asset base of Rs. 1.06 lakh crore during FY2015.
