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Corporation Bank’s tier-II bonds have lost “AAA” status. Rating agency CRISIL has downgraded public sector lender’s lower tier II bonds to “AA+” from “AAA” on the sharp deterioration in asset quality and lower profitability.
The rating downgrade takes into account the sharp deterioration in asset quality from the healthy level in the past. It also reflects sustained lower profitability of the bank than its peers on account of a weak resource profile, CRISIL said in a statement.
The outlook for the tier-II bonds has been revised to stable from negative. The ratings continue to factor in the strong support that is expected from its majority owner, Government of India.
Capital Infusion
The bank plans to raise Rs 1,000 crore through Basel-III compliant additional tier-I capital bonds. CRISILhas assigned its “AA-/Stable” rating to proposed bond offering.
Corporation Bank has adequate capitalisation, driven by continued government support. The bank’s overall Capital Adequacy Ratio was 11.7 per cent with tier-I at 8.2 per cent in March 2014. However, the bank’s tier-I and overall CAR have declined gradually from the healthy levels in the past. Its overall CAR was 14.1 per cent with tier I of 8.7 in March 31, 2011.
Asset Quality Pangs
Corporation Bank’s asset quality has deteriorated significantly in the recent past. The bank’s gross non-performing assets rose to 4.5 per cent in September 2014, from 3.4 per cent in March 2014. Gross NPAs stood at 1.7 per cent in March 2013.
The sharp increase in gross NPAs was primarily due to slippages of large exposures in the large corporate and mid-corporate segments, Crisil said.
Furthermore, proportion of outstanding restructured standard advances was also high at 6.8 per cent (around Rs 9,500 crore) in September, 2014, up from 4.9 per cent as on March 31, 2014.
Crisil said Mangalore-based bank will continue to face asset quality challenges in the near term on continued challenging macroeconomic environment and large exposure to vulnerable sectors like infrastructure (particularly power sector), textiles, and iron and steel.
Pressures on Bottom-line
Corporation Bank's profitability has remained under pressure over the past three years driven by lower net interest margins (NIMs). Additionally, its provisioning costs (credit costs) have risen due to deterioration in asset quality.
The bank's return on assets (RoA) at around 0.36 per cent (annualised) for the first six months of 2014-15. It was 0.27 per cent in 2013-14. RoA was 0.80 per cent in 2012-13. It was above 1 per cent maintained till 2010-11.
NIMs, at around 1.8 per cent for the first six months of 2014-15 (similar to that in 2013-14), remains one of the lowest in the industry.
Its earnings profile has also been impacted by increase in credit costs. It was 1.1 per cent for the first half of 2014-15 as well as and 2013-14. The credit cost was 0.6 per cent in 2011-12.
Bank's profitability will remain significantly lower than that of its peers over the medium term, driven by the continued weakness in its resource profile and its high credit costs, Crisil added.
