In its rating rationale, Ind-Ra said that the affirmation of the Long-Term Issuer Rating factors in Canara’s systemically important position and Ind-Ra’s expectations that the bank will continue to receive support from the government of India (GoI). The Outlook revision reflects the bank’s ability to absorb the impact of asset quality deterioration in FY21 without material deterioration in its credit profile, demonstrated equity raising ability and further plans for the same and expectations of modest profitability in FY22-FY23 that could help the bank maintain and possibly grow its market share in advances and deposits.
On AT1 instruments, the agency considers the discretionary component, coupon omission risk and the write-down/conversion risk as key parameters to arrive at the rating. The agency recognises the unique going-concern loss-absorption features that these bonds carry and differentiates them from the bank’s senior debt factoring in a higher probability of an ultimate loss for investors in these bonds.
Ind-Ra said that the bank witnessed a sharp improvement in its distributable reserves on an amalgamated basis at the end-June 2020, resulting in a significant improvement in its coupon paying ability on AT1 instruments. The gazette notification issued by the Ministry of Finance on 23 March 2020 allows a nationalised bank to appropriate any sum from its share premium account by following the same procedure as for the reduction of paid-up capital. The bank has received board approval and would seek shareholders’ approval for the same.
Ind-Ra believes this provision reduces the risk of erosion of serviceable distributable reserve, as the bank can set off its losses through the premium account if required. Post the above adjustment, Canara’s distributable reserves would have been at 4.3% of the risk-weighted assets at FYE21.
On Sensex, Canara Bank closed at Rs155.85 per piece up by 1.3%.