Crisil downgrades Indian Bank's tier I bonds on lower reserves position

Rating agency Crisil has downgraded public sector lender Indian Bank’s tier I bonds from “AA+” to “AA” due to lower eligible reserves position of the merged bank. Another public sector lender Allahabad Bank merged with Indian Bank from April 01, 2020.

The downgrade in the rating of Tier I bonds (under Basel III) is on account of lower eligible reserves position of the merged bank.  Crisil evaluated the adequacy of Indian Bank's eligible reserves to service coupon after adjusting for any medium-term impact of profitability on reserves position in a stress scenario.

The capital adequacy ratio of Chennai-based lender stood at 13.45 per cent with tier I of 10.47 per cent at end of June 2020. Its stock was trading 2.2 per cent higher at Rs 64.55 per share on BSE.

Crisil has also reaffirmed its 'CRISIL AAA' rating and assigned a 'Negative' outlook to various bonds including tier I (under Basel III),  Tier II Bonds (under Basel III). The 'Negative' outlook reflects the potential stress that the bank's asset quality and consequently its profitability may witness due to the challenging macro environment.

Post the amalgamation, Indian Bank's asset quality metrics have weakened as compared to peers in the rating category. Gross non-performing assets (NPAs) of the bank stood at 11.4% as on April 01, 2020. Also, the combined entity reported a loss of Rs 4,643 crore for fiscal 2020 with a return on assets (RoA) of -0.8 per cent for the period.

Its June 2020 Quarter (Q1FY21) saw some improvement, with Gross Non-Performance Assets (NPAs) at 10.9 per cent and Net profit of Rs 369 crore due to reduction in slippages and provisioning expenses. The continued improvement in performance would be a key rating sensitivity factor.

From an industry perspective, the nationwide lockdown, imposed by the government to contain the spread of the Covid-19 pandemic, has impacted disbursements and collections of financial institutions.

Indian Bank has provided moratorium to its borrowers in line with the relief measures provided by Reserve Bank of India (RBI). Any change in behaviour of borrowers on the payment discipline can affect asset quality levels post the moratorium.