Canara Bank — Management Reports 2021

Nov 25, 2021

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25.11.2021

Ref:: SD:430/431/11/12::2021 The Vice President The Vice President BSE Ltd. Listing Department Phiroze Jeejeebhoy Towers National Stock Exchange of India Ltd Dalal Street EXCHANGE PLAZA MUMBAI - 400 001 Bandra-Kurla Complex, Bandra [E] MUMBAI - 400 051 Scrip Code: 532483 Scrip Code: CANBK

Dear Sir/Madam,

Sub: Upgradation/Affirmation of Ratings by Care Ratings (Rating Agency) Ref: Disclosure under Regulation 30 of SEBI (LODR) Regulations, 2015

The Exchanges are hereby informed that Care Ratings has revised/upgraded the rating of Bank's Additional Tier I Bonds (Basel III) to 'CARE AA+; Stable'. Care Ratings has also reaffirmed its rating on Bank's Tier II Bonds (Basel III) to 'CARE AAA; Stable. The instrument-wise rating is as under:

Amount (Rs. Crore) 3,000 4,400 1,450 8,850	Rating/Outlook Rating Action CARE AAA; Stable Reaffirmed (Triple A; Outlook: Stable) CARE AAA; Stable Reaffirmed (Triple A; Outlook: Stable) CARE AA+; Stable Revised from (Double A Plus; Outlook: CARE AA; Stable Stable) (Double A; Outlook: Stable)

The detailed rating action along with the rating rationale is available on their website (www.careratings.com). A copy of the ratings along with the rating rationale is also enclosed herewith.

This is for your information and appropriate dissemination.

Yours faithfully, � w-m f$ For CANARA BANK -J� ���3l.1jiqf.!r� Assistant General Manager & Company Secretary VINAY MOHTA COMPANY SECRETARY

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E-Mail - hosecretarial@canarabank.com	www. canarabank. corn

Press Release

Canara Bank

November 24, 2021

Ratings

**Ratings **
Instrument	Amount (Rs. crore)	Rating1	Rating Action
Tier II Bonds (Basel III)#	3,000.0	CARE AAA; Stable (Triple A; Outlook: Stable)	Reaffirmed
Tier II Bonds (Basel III)#	4,400.0$	CARE AAA; Stable (Triple A; Outlook: Stable)	Reaffirmed
Additional Tier I Bonds (Basel III)@	1,450.0$	CARE AA+; Stable (Double A Plus; Outlook: Stable)	Revised from CARE AA; Stable (Double A; Outlook: Stable)
Total	8,850.0 (Rs. Eight thousand eight hundred fifty crore only)

Details of instruments/facilities in Annexure-1;

$Transferred from erstwhile Syndicate Bank pursuant to its amalgamation with Canara Bank.

#Tier-II Bonds under Basel III are characterized by a ‘Point of Non-Viability’ (PONV) trigger due to which the investor may suffer a loss of principal. PONV will be determined by the Reserve Bank of India (RBI) and is a point at which the bank may no longer remain a going concern on its own unless appropriate measures are taken to revive its operations and thus, enable it to continue as a going concern. In addition, the difficulties faced by a bank should be such that these are likely to result in financial losses and raising Common Equity Tier-I capital of the bank should be considered as the most appropriate way to prevent the bank from turning non-viable. In CARE Ratings’ opinion, the parameters considered to assess whether a bank will reach the PONV are similar to the parameters considered to assess rating of Tier-II instruments even under Basel II. CARE Ratings has rated the TierII bonds under Basel III after factoring in the additional feature of PONV.

@CARE Ratings has rated the aforesaid Basel III Compliant Additional Tier-I Bonds after taking into consideration its key features as mentioned below:

• The bank has full discretion at all times to cancel coupon payments.

• The coupon is to be paid out of current year profits. However, if the current year’s profits are not sufficient, i.e., payment of such coupon is likely to result in losses during the current year, the balance of coupon payment may be made out of revenue reserves and/or credit balance in profit and loss account provided the bank meets the minimum regulatory 2 CARE Ratings Limited Press Release requirements for Common Equity Tier I [CET I], Tier I and Total Capital Ratios and capital buffer frameworks as prescribed by the Reserve Bank of India [RBI].

• The instrument may be written-down upon CET I breaching the pre-specified trigger of 5.5% before March 31, 2019, and 6.125% on and after October 1, 2021, or written-off / converted into common equity shares on occurrence of the trigger event called point of non-viability (PONV). The PONV trigger shall be determined by RBI. Any delay in payment of interest/principal (as the case may be) due to invocation of any of the features mentioned above would constitute as an event of default as per CARE Ratings’ definition of default and as such these instruments may exhibit a somewhat sharper migration of the rating compared with other subordinated debt instruments.

Detailed Rationale & Key Rating Drivers

The ratings assigned to debt instruments of Canara Bank continue to derive strength from majority ownership by Government of India (GoI), its market position as third-largest Public Sector Bank (PSB) as on September 30, 2021, its established retail franchise with strong network in southern states of India and experienced management. The rating strengths are partially offset by relatively low CASA and modest asset quality levels.

As per CARE Ratings’ (CARE’s) criteria for rating of hybrid instruments issued by banks, CARE has been notching down the Additional Tier I (AT I) Bonds issued by the banks by one to several notches below the Tier II Bond rating depending on the expected adequacy of eligible reserves, cushion over minimum regulatory capital and other credit risk assessment parameters of the individual bank to factor in the additional risk in these instruments on account of several unique features of these instruments including loss absorption features and coupon discretion clause which make them very different from other types of debt instruments.

For public sector banks (PSB), the current ratings factor in government support. The restriction on coupon payment in the event of loss or through distributable reserve may pose challenge in coupon servicing for weaker banks. However, in the past, the GoI, as the majority shareholder, has provided support to PSBs in terms of capital infusion on need basis to not only make the coupon payments but also to call back the bonds.

1 Complete definitions of the ratings assigned are available at www.careratings.com and in other CARE publications.

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Apart from capital support, PSBs have received support from GoI and the regulator in terms of allowing accumulated losses to be set-off against the share premium account which has increased the quantum of distributable reserves available to service the AT I Bonds. GoI also has initiated consolidation of the sector by amalgamation of relatively weaker and smaller banks into larger banks which has seen strengthening of balance sheets of the PSBs. CARE further expects that GoI would provide capital support to PSBs on need basis so that covenants for coupon payment is not breached in future.

In this background, CARE has revised the rating of AT I Bonds of Canara Bank considering the strengthening in overall credit profile of the bank including improvement in capital cushions over minimum regulatory requirement, improvement in profitability and improvement in the distributable reserves position. The revision in the ratings assigned to debt instruments of Canara Bank consider the setting off accumulated loss amounting Rs.18,495.30 crore against share premium reserve in Q2FY22 which improved the amount of distributable reserves available for AT1 coupon payment and the improvement in capitalization levels supported by fresh equity infusion of Rs.2,500 crore in H1FY22 (refers to the period April 1 to September 30).

Rating Sensitivities

Positive factors-Factors that could lead to positive rating action/upgrade

• Not Applicable

Negative factors- Factors that could lead to negative rating action/downgrade

• Significant slippages impacting earnings profile and deterioration in Net NPA to net worth.

• Deterioration in capitalisation levels on a sustained basis and inability to maintain sufficient cushion over the regulatory capital.

Detailed description of the key rating drivers

Key Rating Strengths

Majority ownership by Government of India (GOI) and demonstrated support

GoI continues to have majority stake in the bank from which CB has received periodical capital infusion and experienced management and the same is expected to continue. As per directive from Ministry of Finance, GOI, Syndicate Bank (SB) has merged with Canara Bank (CB) effective from April 01, 2020. Currently, Canara Bank is the third-largest PSB as on September 30, 2021, increasing the strategic importance of the bank. During the past five fiscals (FY16-FY20 [refers to the period April 1 to March 31]), GOI has infused Rs.20,701 crore on a combined basis in Canara Bank and Syndicate Bank. As part of its recapitalization plan, GOI had infused Rs.6,571 crore during September 2019. GOI is the majority shareholder holding 62.93% stake as on September 30, 2021 (69.33% as on March 31, 2021). During Q3FY21, the bank raised Rs.2,000 crore by way of QIP issue in which LIC was major subscriber. Also, in order to further strengthen its capital position, the bank has raised Rs.2,500 crore by way of QIP issue in Q2FY22.

Merger update:

The bank has completed integration process in terms of policies and processes for services provided to customers and customers of both Canara Bank and erstwhile Syndicate Bank can avail the services from any of the branches of the merged entity. Treasury operations and IT processes have been successfully integrated from April 01, 2020. The bank has reorganized the Regional Offices, Circle Offices and created various Verticals at Head Office to meet the requirement of Amalgamated Bank. The Migration of CBS to upgraded version 11.8 and Peripheral Applications (Internet Banking, Mobile Banking, UPI, CTS, Government Business Modules, etc) was completed in January 2021.

Established franchise and deposit base with a strong presence in the southern states

Total business of the bank stood at Rs.17.19 lakh crore as on September 30, 2021, with deposit base of Rs.10.32 lakh crore and advances of Rs.6.86 lakh crore. The bank has an established presence with network of 9,800 branches and 10,988 ATMs as on September 30, 2021. The bank also has four international branches in New York, London, Hong Kong and Dubai.

Improvement in Profitability levels

During FY21, the bank reported PAT of Rs.2,557 crore as against loss of Rs.5,838 crore reported in FY20. The improvement in PAT is supported by both increase in net interest income and non-interest income. Supported by relatively higher decrease in cost of deposits, NIM improved to 2.22% in FY21 from 2.01% in FY20. With increase of 40% in non-interest income and relatively stable operating expenses, Canara Bank reported pre-provisioning operating profit (PPOP) of Rs.20,009 crore in FY21 (PY: Rs.12,832 crore in FY20). During FY21, Credit cost improved to 1.61% from 1.85%. The bank made additional provision in FY21 on account of Covid-19, aggregating to Rs.500 crore. Total Provisioning on account of Covid-19 stood at Rs.994 crore (of this Rs.494 crore corresponds to provision related to OTR accounts). The provision coverage ratio (Including technical write-off) stood at around 80%.

During H1FY22, the bank reported PAT of Rs.2,510 crore as against PAT of Rs.851 crore in H1FY21. With decline in interest income, NIM witnessed a marginal decline, however, with higher non-interest income on account of higher treasury profits

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and improvement in operating expenses, CB reported higher operating profit of Rs.11,084 crore, thus, translating into a growth of 20.47% (Y-o-Y).

Capital adequacy improved with fresh Infusion of capital in FY21 and H1FY22

Canara Bank raised capital in form of AT1 Bonds and Common Equity during FY21 aggregating to Rs.4,936 crore. The bank has raised Equity Capital to the tune of Rs.2,000 crore in Q3FY21 through QIP. CB’s CET I, Tier I and Total CAR stood at 8.62%, 10.08% and 13.18% as on March 31, 2021 as against 8.40%, 9.56% and 12.96% as on April 1, 2020. The bank raised additional equity of Rs.2,500 crore during Q2FY22, thus strengthening the capital adequacy. Total CAR stood at 14.37% as on September 30, 2021. Furthermore, the bank has also raised capital aggregating to Rs.1,500 crore in the form of AT1 Bonds in the month of October 2021 which is further expected to strengthen the capital position of the bank. With these the extent of capital cushion available over regulatory minimum has witnessed further improvement in H1FY22.

Key Rating Weaknesses

Improvement in asset quality with relatively more recoveries and reduced slippages

Bank’s asset quality continues to remain moderate albeit improved during FY20 and FY21. Aided by lower net slippages on account of various measures announced by RBI including extension of moratorium and additional credit lines under various schemes, higher amount of recoveries and write-off, the bank’s asset quality improved in FY21. With reduction in slippage ratio to 2.35% in FY21 from 4.28% in FY20, bank’s Gross NPA ratio improved to 8.93% (PY: 9.39%) and Net NPA ratio improved to 3.82% (PY: 4.34%). In H1FY22, asset quality improved marginally on account of higher recoveries and GNPA and NNPA ratio stood at 8.42% and 3.21% as on September 30, 2021.

The bank has restructured the portfolio, under Covid-19 Resolution Framework 1.0 aggregating to Rs.5,067 crore (0.74% of gross advances) and restructured portfolio aggregating to Rs.13,475 crore under Covid-19 Resolution Framework 2.0 (1.96% of gross advances). Going forward, the ability of the bank to limit incremental slippages or restructuring and maintain asset quality would be critical to the earnings profile of the bank and the same will be a key rating sensitivity.

Relatively low CASA share but high retail deposit

Aided by widespread branch network, the bank has witnessed steady growth in the bank’s low-cost CASA deposits by 14% YoY to Rs.3.30 lakh crore as on March 31, 2021 from Rs.2.90 lakh crore as on March 31, 2020 (on combined basis) and the bank’s share of CASA in domestic deposits improved to 34.33% as on March 31, 2021 from 33.36% as on March 31, 2020. Share of bank retail term deposit (as a percentage of total deposit) stood at 41.58% as on March 31, 2021 (PY: 39.84%). Share of bulk deposits reduced to 21.00% of the total deposits as on March 31, 2021 (24.10% as on March 31, 2020). As on September 30, 2021, deposits stood at Rs.10,32,536 crore (2.14% growth during H1FY22), whereas share of CASA in domestic deposits was maintained at 34.11% as on September 30, 2021.

Impact of Covid-19

Impacted by the second wave of Covid-19, In April 2021, Collection Efficiency reduced to 88.8% from 92% in March 2021. The gross stressed assets (GNPA+ Standard Restructured assets+ Security Receipts outstanding) as a percentage of gross advances stood at 10.74% as on March 31, 2021. The bank has restructured around Rs.18,542 crore of portfolio under resolution framework 1.0 and 2.0 (2.70% of gross advances). The bank’s ECLGS book stood at Rs.11,044 crore (1.61% of gross advances) as on September 30, 2021. The same is expected to increase the total stressed assets portfolio; however, it remains comparable to its peers.

Liquidity: Strong

According to the bank’s structural liquidity statement (SLS) as on March 31, 2021, there are no negative cumulative mismatches in up to 1-year maturity bucket. Furthermore, the bank has maintained an excess SLR investment of Rs.103,942 crore as on March 31, 2021. These factors provide cushion to the bank’s liquidity profile. CB’s liquidity coverage ratio stood at 129.18% for quarter ended March 31, 2021, against the minimum regulatory requirement of 90% (till March 31, 2021). (100% from April 1, 2021). Furthermore, the bank has access to market liquidity support like Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF) from RBI.

Analytical approach: Standalone along with expected support from GOI. Applicable Criteria

Criteria on assigning ‘outlook’ and ‘credit watch’ to Credit Ratings CARE’s Policy on Default Recognition Rating Methodology – Banks Financial ratios – Financial sector - Criteria for Rating Basel III Hybrid Capital Instruments issued by Banks Factoring Linkages Government Support

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About the Company

Canara Bank (CB) is a Bengaluru-based public sector bank which was established in 1906. As per directive from Ministry of Finance, GOI for amalgamation of Syndicate Bank (SB) into Canara Bank the merger has become effective from April 1, 2020. Currently, Canara Bank is the third-largest PSB as on September 30, 2021, increasing the strategic importance of the bank. GOI is the majority shareholder holding 62.93% stake in the bank followed by LIC of India holding 8.83% as on September 30, 2021. As on September 30, 2021, the Bank (on combined basis) had 9,800 branches, of which 3,037 are in rural, 2,796 in semi-urban, 1,971 in urban and 1,996 in metro areas. The bank also has four overseas branches located at New York, London, Hong Kong and Dubai. Mr Lingam Venkata Prabhakar is the MD and CEO, who is assisted by a team of Executive Directors and General Managers heading various departments. As on September 30, 2021, the bank had gross advances of Rs.686,813 crore and deposits of Rs.1,032,536 crore.

Brief Financials(Rs. crore)	FY20*	FY21(A)	H1FY22(P)
Total operatingincome	81,710	84,525	42,272
PAT	-5,838	2,557	2,510
Total Assets	1,028,429	1,134,372	1,199,133
Net NPA(%)	4.34	3.82	3.21
ROTA(%)	-0.58	0.24	0.43

A: Audited; P: Provisional *Combined Financials of CB+SB. Note: All Analytical ratios are as per CARE Ratings’ calculations. Total Assets exclude deferred tax assets and are net of revaluation reserve

Status of non-cooperation with previous CRA: Not Applicable

Any other information: Not Applicable

Rating History for last three years: Please refer Annexure-2

Complexity level of various instruments rated for this company: Annexure 3

Annexure-1: Details of Instruments/Facilities

					Size of the	Rating assigned
Name of the		Date of	Coupon	Maturity
	ISIN No.				Issue	along with
Instrument		Issuance	Rate	Date
					(Rs. crore)	Rating Outlook
Tier II Bonds (Basel III)-I	INE476A08076	March 11, 2020	7.18%	March 11, 2030	3000.00	CARE AAA; Stable
Bonds- Lower Tier II bonds-II	INE667A09177	December 31, 2012	9.00%	December 31, 2022	1000.0	CARE AAA; Stable
Tier II Bonds (Basel III)-II	INE667A08021	March 23, 2015	8.75%	March 23, 2025	400.0	CARE AAA; Stable
Tier II Bonds (Basel III)-II	INE667A08013	December 02, 2014	8.95%	December 02, 2024	750	CARE AAA; Stable
Tier II Bonds (Basel III)-II	INE667A08039	September 28, 2015	8.58%	September 28, 2025	1000.0	CARE AAA; Stable
Tier II Bonds (Basel III)-II	INE667A08047	December 18, 2015	8.62%	December 18, 2025	750.0	CARE AAA; Stable
Tier II Bonds (Basel III)-II	INE667A08096	May 03, 2017	8.00%	May 03, 2027	500.0	CARE AAA; Stable
Additional Tier I Perpetual Bonds (Basel III)-I	INE667A08088*	October 24, 2016	9.95%	Perpetual	1000.0	CARE AA+; Stable
Additional Tier I Perpetual Bonds (Basel III)-I	INE667A08104	July 25, 2017	9.80%	Perpetual	450.0	CARE AA+; Stable

*Redeemed

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Annexure-2: Rating History of last three years

Sr. No.	Name of the Instrument/Bank Facilities		Current Ratings	Current Ratings		**Rating **	history
		Type	Amount Outstanding (Rs. crore)	Rating	Date(s) & Rating(s) assigned in 2021-2022	Date(s) & Rating(s) assigned in 2020-2021	Date(s) & Rating(s) assigned in 2019-2020	Date(s) & Rating(s) assigned in 2018-2019
1	Bonds-Tier II Bonds	LT	3000.00	CARE AAA; Stable	1)CARE AAA; Stable (03-Aug-21)	1)CARE AAA; Negative (03-Sep-20)	1)CARE AAA (CWD) (03-Mar-20)	-
2	Bonds-Tier II Bonds	LT	4400.00	CARE AAA; Stable	1)CARE AAA; Stable (03-Aug-21)	1)CARE AAA; Negative (03-Sep-20)	-	-
3	Bonds-Tier I Bonds	LT	1450.00	CARE AA+; Stable	1)CARE AA; Stable (03-Aug-21)	1)CARE AA; Negative (03-Sep-20)	-	-

* Long Term / Short Term

Annexure-3 Detailed explanation of covenants of the rated instrument / facilities

Basel III Tier-II bonds	Detailed explanation
Non-Financial covenants
i. Conditions for exercise of call option	On or after the 5th anniversary date from the date of allotment or any anniversary issuer may at its sole discretion, having notified the trustee not less than 21 calendar days prior to date of exercise of such issuer call subject to prior approval of RBI subject to tax call/regulatory call or issuer demonstrates that its capital position is well above the minimum capital requirements after the issuer call is exercised.

Annexure 4: Complexity level of various instruments rated for this company

Sr No	Name of instrument	Complexity level
1	Tier II Bonds(Basel III)	Simple
2	Tier II Bonds(Basel III)	Complex
3	Lower Tier II	Complex
4	Tier I Bonds(Basel III)	Complex

Note on complexity levels of the rated instrument: CARE Ratings has classified instruments rated by it on the basis of complexity. This classification is available at www.careratings.com. Investors/market intermediaries/regulators or others are welcome to write to care@careratings.com for any clarifications.

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About CARE Ratings:

CARE Ratings commenced operations in April 1993 and over two decades, it has established itself as one of the leading credit rating agencies in India. CARE is registered with the Securities and Exchange Board of India (SEBI) and also recognized as an External Credit Assessment Institution (ECAI) by the Reserve Bank of India (RBI). CARE Ratings is proud of its rightful place in the Indian capital market built around investor confidence. CARE Ratings provides the entire spectrum of credit rating that helps the corporates to raise capital for their various requirements and assists the investors to form an informed investment decision based on the credit risk and their own risk-return expectations. Our rating and grading service offerings leverage our domain and analytical expertise backed by the methodologies congruent with the international best practices.

Disclaimer

CARE’s ratings are opinions on the likelihood of timely payment of the obligations under the rated instrument and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. CARE’s ratings do not convey suitability or price for the investor. CARE’s ratings do not constitute an audit on the rated entity. CARE has based its ratings/outlooks on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Most entities whose bank facilities/instruments are rated by CARE have paid a credit rating fee, based on the amount and type of bank facilities/instruments. CARE or its subsidiaries/associates may also have other commercial transactions with the entity. In case of partnership/proprietary concerns, the rating /outlook assigned by CARE is, inter-alia, based on the capital deployed by the partners/proprietor and the financial strength of the firm at present. The rating/outlook may undergo change in case of withdrawal of capital or the unsecured loans brought in by the partners/proprietor in addition to the financial performance and other relevant factors. CARE is not responsible for any errors and states that it has no financial liability whatsoever to the users of CARE’s rating.

Our ratings do not factor in any rating related trigger clauses as per the terms of the facility/instrument, which may involve acceleration of payments in case of rating downgrades. However, if any such clauses are introduced and if triggered, the ratings may see volatility and sharp downgrades.

**For detailed Rationale Report and subscription information, please contact us at www.careratings.com

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