By Jindal Haria

India Ratings and Research (Ind-Ra) revised Bank of India’s (BoI) Outlook to Negative from Stable while affirming the Long-Term Issuer Rating at ‘IND AA+’. The instrument-wise ratings are as follows:

Instrument Type

ISIN

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Basel III Tier 2 bonds

INE084A08110

27 March  2017

8

27 March 2027

INR10

IND AA+/Negative

Rating affirmed; Outlook to Negative

Basel III AT1 perpetual bonds

INE084A08128

2 November 2017

8.79

Perpetual

INR5

WD

Withdrawn (fully repaid)

KEY RATING DRIVERS

Minimum Sustainability Support-driven Rating: The Outlook revision reflects the impairment in BoI’s ability to sustain its current position of systemic importance, with the possibility of a dip in its overall share of systemic assets and liabilities, mirroring the sharp deterioration in its asset quality. Ind-Ra expects BoI’s stock of non-performing assets, restructured assets and overdue loans (in the special mention category) resulted in substantial credit costs of 4.26% in FY18 (FY17: 3.22%) and this would continue in FY19. Also, the capital infused by the government of India (GoI) in FY18, although substantial, is likely to prove inadequate and the bank would require a higher additional quantum to expand lending operations. The Negative Outlook also reflects the possibility of the bank remaining under ‘prompt corrective action’ for an extended period, due to its expected weak capital position and high non-performing assets in FY19. This could result in the bank continuing to cede its market share (either by not growing or by declining) in deposits and advances and thereby its systemic importance.

 

Large Capital Requirement through FY19-FY20: BOI’s capitalisation remains weak, despite regular infusions by the GoI. The bank reported a common equity tier-1 ratio of 7.9% at end-March 2018, supported by the GoI’s infusion of INR92.3 billion in the bank in 2HFY18. Ind-Ra expects the bank’s credit costs in Q4FY18-FY19 to exceed the total capital expected from the GoI under the current bank recapitalisation programme; and hence, the capitalisation levels may deteriorate. Ind-Ra expects the bank’s to require about INR150 billion of equity in FY19-FY20, part of which could come from infusions by the GoI from the balance amount of the programme, to maintain the minimum regulatory Tier 1 capital requirements (9.5%). 

Asset Quality Overhang to be Severe and Persistent:
Ind-Ra expects BoI’s asset quality levels to remain under pressure over the next two years, given the chunky exposures on its balance sheet in various categories of stressed assets. Most of the exposures, where S4A, SDR, 5:25 etc were under various stages of approvals have slipped to NPAs mostly in 4QFY18 and the balance (INR32 billion) could slip in FY19. In addition, slippages from other stressed-but-restructured standard assets (FY18: 2.7% of advances) and haircuts on National Company Lay Tribunal cases could cause the credit costs to remain elevated at 2.5%-3.5% annually till FY20 (4.26% of advances in FY18), without any regulatory forbearance. Ind-Ra also expects substantial incremental slippages from the SMA1-SMA2 stock (significant proportion of which are exposures below INR100 million) that constituted 8%-10% of FY18 gross advances; adjusted for the overlap with earlier categories of stressed loans.

Standalone Profile
 Weak: The bank’s operating buffers are weaker than those of its peers, on account of its high credit costs and modest net interest margins. Lower current account deposit ratio and overall declining share in deposits could also add pressure on the bank’s liability profile. Ind-Ra expects return on assets to remain in the negative territory over FY19-FY20 (FY16: negative 1%, FY17: negative 0.3%; FY18: negative 0.91%).

Deposit Profile & Liquidity See Marginal Improvement; but Share Declines:
The domestic current and savings account deposits improved to 41% in FY18 from 39% while foreign deposits declined over 16% yoy. The bank’s deposit share declined to about 5% in FY18 from about 5.4% in FY17. The significant decline in the deposits could result in a further decrease in the share in deposits and thereby BoI’s systemic importance could decline over the medium term. On the liquidity front, BoI’s short-term funding gap has improved to 2%-3% in FY17 and 9MFY18 from negative 11% in FY16. At end-December 2017, BoI’s liquidity coverage ratio was 136%, higher than the regulatory requirement of 100%. However, the bank’s stable deposits as a percentage of retail and small customer deposits is about 2% against 25%-30% for peers and hence the pressure to replenish the retail deposits would be high.


RATING SENSITIVITIES

Negative: The tier 2 instruments rating has been linked to BoI’s Long-Term Issuer Rating which could change in absence of even stronger demonstration of government support.

Positive:
A positive rating action would be contingent on stronger demonstration of government support, a significant improvement in the financial profile of the bank, including an enhancement of the capitalisation buffers and its ability to grow its systemic importance.


COMPANY PROFILE

BoI had a branch network of 5,127 branches and 7,717 ATMs as of 3QFY18. At end-December 2017, the bank had an advances share of about 4.5% and deposit share of about 4.9%.

 

FINANCIAL SUMMARY

 

Particulars

FY18

FY17

Total assets (INR million)

6,095,748

6,263,093

Total equity (INR million)

355,406

307,651

Net income (INR million)

-60,437

-15,583

Return on assets (%)

-0.24

-0.91

CET1 (%)

7.87

7.17

Capital adequacy ratio (%)

12.94

12.14

Source: Company annual report


RATING HISTORY

Instrument Type

Current Rating/Rating Watch

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

14 September 2017

27 March 2017

Issuer Rating

Long-term

-

IND AA+/Negative

IND AA+/Stable

IND AA+/Stable

Basel III Tier 2 bonds

Long-term

INR10

IND AA+/Negative

IND AA+/Stable

IND AA+/Stable

Basel III AT1 perpetual bonds

Long-term

INR5

WD

IND A+/Stable

-


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

ABOUT INDIA RATINGS AND RESEARCH

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Analyst Names

  • Primary Analyst

    Jindal Haria

    Associate Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001750

    Media Relation

    Archana Tiwari

    Sr. Manager – Corporate Communications & Investor Relations
    +91 22 40001729