CRISIL has assigned its ‘CRISIL AA+/Stable’ rating to the Rs.10 billion long-term infrastructure bonds of Andhra Bank, making it the first issuance to be rated after the Reserve Bank of India (RBI) revised regulations on July 15.
The new rules are positive for banks, as they open up a much-needed, long-term funding avenue – that, too, with minimum regulatory pre-emption. Says Pawan Agrawal, Senior Director, CRISIL Ratings “Given the exemption from statutory reserve requirements and priority-sector obligations, these bonds will be cost-effective for the issuing bank. The benefit would be around 75 basis points compared with longer-maturity deposits. The bonds will also help banks improve their asset-liability profile.”
The RBI’s move to revise the regulations on long-term bonds (with a minimum maturity of seven years) for financing infrastructure projects and for affordable housing -- by scheduled commercial banks followed a similar announcement in the Union Budget on July 10. Apart from statutory liquidity ratio and cash reserve ratio exemptions, advances against these bonds are also exempt from priority-sector lending obligations.
Around a fifth of outstanding banking sector credit as on March 31, 2014, was to infrastructure and affordable housing segments. CRISIL estimates at least Rs.3 trillion of loans to these sectors – both current and prospective -- would qualify for funding through infrastructure bonds in the current fiscal. Agrawal said “Given the magnitude of eligible loans for funding, the issuances of these bonds will pick up over time.” CRISIL believes these measures by RBI will also help in deepening and developing the Indian bond market."
CRISIL has assigned its ‘CRISIL AA+/Stable’ rating to the Rs.10.0 billion infrastructure bond issue of Andhra Bank. CRISIL has also reaffirmed its ratings on the bank’s Tier I Perpetual Bonds and Upper Tier-II bonds at ‘CRISIL AA/Stable’. The ratings continue to factor in the strong support that Andhra Bank will receive from the Government of India (GoI), and the bank’s adequate capitalisation. These rating strengths are partially offset by Andhra Bank’s modest asset quality and earnings profile. Further, the bank could witness additional pressure in the near term due to farm loan waivers announced by the state governments of Andhra Pradesh and Telangana.
In its ratings on public-sector banks (PSBs), CRISIL continues to factor in the likelihood of strong support from GoI, both on an ongoing basis and in the event of any distress. This is because GoI is both the majority shareholder in PSBs and the guardian of India’s financial system. The stability of the banking sector is of prime importance to GoI, given the criticality of the sector to the economy, the strong public perception of sovereign backing for PSBs, and the severe political repercussions in case of failure of any PSB on sovereign credit-worthiness. CRISIL believes that the majority ownership creates a moral obligation on GoI to support PSBs, including Andhra Bank. Furthermore, GoI is committed to infusing capital in PSBs on an ongoing basis so as to ensure a Tier-I capital adequacy ratio (CAR) as per Basel III requirements. Since 2008-09, GoI has already infused or committed capital of around Rs.640 billion in PSBs. The bank has received capital of Rs.2.0 billion in December 2013 from GoI indicating GoI’s commitment to extend capital support to the bank.
Andhra Bank has adequate capitalisation, with Tier I and overall CAR at 8.09 per cent and 10.78 per cent respectively (Under Basel III) as on March 31, 2014. Furthermore, GoI’s shareholding of 60.14 per cent as on June 30, 2014, provides the bank with some flexibility to raise additional equity capital by diluting GoI’s stake. The bank has received capital of Rs.2.0 billion by in December 2013 from GoI. However, its net worth coverage for net NPAs has dipped to around 2.6 times as on March 31, 2014 from 3.5 times as on March 31, 2013 because of deterioration in its asset quality. Nevertheless, CRISIL believes that Andhra Bank’s capital position will remain comfortable over the medium term on account of continued GoI support.
Andhra Bank’s asset quality is modest, with higher-than-industry-average gross non-performing assets (NPAs) and weak assets1 months to 5.3 per cent as on March 31, 2014 (industry average was 3.9 per cent) from 3.7 per cent as on March 31, 2013, and 2.1 per cent as on March 31, 2012. The increase in gross NPAs was mainly due to deterioration in large and medium corporate advances, given the weak macroeconomic. The bank’s gross NPA ratio has increased sharply in the past 24 environment. Also, its total restructured standard advances (RSAs) outstanding was high, at 10.0 per cent of its total advances as on March 31, 2014. Andhra Bank’s large proportion of gross NPAs and RSAs translate into a high level of weak assets of around 7.3 per cent as on March 31, 2014 (6.0 per cent as on March 31, 2013). CRISIL believes that Andhra Bank’s asset quality will remain under pressure over the medium term, given the challenging macro-economic environment and the bank’s sizeable exposure to vulnerable sectors such as infrastructure and iron and steel. Moreover, farm loan waiver announcements by state governments of Andhra Pradesh and Telangana could have a short term impact on the bank’s asset quality, given its sizeable exposure to this segment. However, the impact of the same over the long term will remain a key rating monitorable.
Andhra Bank has modest earnings profile as reflected in its lower-than-industry-average return on assets (RoA). The bank’s RoA has declined sharply to 0.3 per cent for 2013-14 from around 1.0 per cent in 2012-13 (refers to financial year, April 1 to March 31) primarily because of higher provisions given the deterioration in the bank’s asset quality, and decline in interest margins. The bank’s cost of borrowings at 7.3 per cent for 2013-14, continues to remain higher than industry average due to the lower proportion of low-cost current account and savings account (CASA) deposits (24.8 per cent as on March 31, 2014). CRISIL believes that Andhra Bank’s profitability is likely to remain modest over the medium term, given the asset quality challenges faced by the bank.