State Bank of Travancore

Instruments Amount Rating Action (Rs. Crore)1 (October 2016) Lower Tier-II Bond Programme 250.00 [ICRA]AAA (stable); reaffirmed Lower Tier-II Bond Programme 375.00 [ICRA]AAA (stable); withdrawn Tier-II Bonds Programme-Basel III 691.00 [ICRA]AAA (hyb) (stable); withdrawn

ICRA has reaffirmed the [ICRA]AAA (pronounced ICRA triple A) rating with stable outlook for the Rs. 250.00 crore lower tier-II bond programme of State Bank of Travancore (SBT). ICRA has withdrawn the [ICRA]AAA rating assigned to the bank’s Rs. 375.00 crore lower tier-II bond programme as requested by the bank, as the rated instrument has been fully redeemed and there is no amount outstanding. ICRA has also withdrawn the [ICRA]AAA (hyb) (pronounced ICRA triple A hybrid) rating assigned to the bank’s Rs. 691.00 crore Basel III compliant tier-II bonds, as no funds were raised against this rated instrument and there is no amount outstanding.

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 highest credit quality rating for SBT factors in its strong parentage (79% stake held by State Bank of India (SBI); rated [ICRA]AAA(stable)/[ICRA]A1+), 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 in June 2016 to merge the five SBI associate banks with its parent; the merger process is expected to be completed by March 2017.

SBT’s gross NPAs increased moderately from 3.8% as on September 30, 2015 (3.4% as on March 31, 2015) to 4.8% as on March 31, 2016; the gross NPAs however increased steeply to 9.4% as on June 30, 2016 on account of the alignment of the bank’s asset recognition and provisioning norms in-line with SBI’s to facilitate the merger process. As on June 30, 2016, the bank had standard restructured assets (excluding state electricity boards) of 3.0% (reduced from 4.7% as on March 31, 2016 and 6.0% as on March 31, 2015) and as per ICRA’s estimate, other vulnerable exposure of around 2%, which could exert more pressure on the bank’s asset quality profile during the current fiscal.

While the bank has raised equity capital of Rs. 474 crore through a rights issue and tier-II capital of Rs. 515 crore during FY2016, it has not raised any capital so far during the current fiscal. As on June 30, 2016, SBT’s capitalization profile was moderate with tier-I capital at 8.15% (CET-1 at 7.86%). During FY2016, despite an increase in provisioning cost2 to 1.2% from 0.8% during FY2015, the bank’s net profitability3 remained stable at 0.3% aided by a marginal improvement in its net interest margin (with a reduction in cost of funds) and non- interest income during the year. During Q1FY2017, a steep increase in credit provisioning to 4.1% resulted in net losses of -2.6% of average total assets.

During FY2016, the bank’s gross advances declined by 4.1% to Rs. 0.67 lakh crore as on March 31, 2016 on account of a decline in corporate and agriculture advances. During FY2016, the proportion of corporate advances in gross advances declined to 47% (49% as on March 31, 2015) with the share of retail advances increasing to 31% (from 27% as on March 31, 2015), in-line with the bank’s shift in focus from corporate to retail segment. During FY2016, the total deposits grew by 11.0% to Rs. 1.01 lakh crore with the proportion of CASA deposits improving from 29.8% to 31.8% and the proportion of bulk deposits (greater than Rs. 1 crore) reducing from 13.2% to 9.3%.

1 Rs. 1 crore = Rs. 10 million = Rs. 100 lakh 2 Total provision and contingencies / Average total assets 3 Net profit / Average total assets

Bank Profile SBT is part of SBI group and is 79% owned by SBI as on June 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 FY2016, SBT reported a net profit of Rs. 338 crore on a total asset base of Rs. 1.15 lakh crore as against a net profit of Rs. 336 crore on a total asset base of Rs. 1.06 lakh crore in FY2015. In Q1FY2017, the bank reported a net loss of Rs. 743 crore vis-a-vis a net profit of Rs. 81 crore for Q1FY2016

October 2016

For further details please contact: Analyst Contacts: Mr. Karthik Srinivasan (Tel No +91 22 6114 3444) [email protected]

Mr. A M Karthik (Tel. No. +91 44 4596 4308) [email protected]

Mr. Vivekanandan L (Tel. No. +91 44 4297 4306) [email protected]

Relationship Contacts: Mr. Jayanta Chatterjee (Tel. No. +91-80-43326401) [email protected]

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