By Jindal Haria

India Ratings and Research (Ind-Ra) has affirmed Bank of Baroda’s (BOB) Long-Term Issuer Rating at ‘IND AAA’ with a Stable Outlook and Short-Term Issuer Rating at ‘IND A1+’. The instrument-wise rating actions are given below:

Instrument Type*

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Short-term debt programme

-

-

-

-

IND A1+

Affirmed

Fixed deposit

-

-

-

-

IND tAAA/Stable

Affirmed

Basel III Tier 2 instrument

-

-

-

INR20

WD

Withdrawn (the company did not proceed with the instrument as envisaged)

Basel III Tier 2 instrument*

-

-

-

INR15

IND AAA/Stable

Assigned

Basel III AT1 bonds^

-

-

-

INR65

IND AA+/Stable

Affirmed

Certificate of deposits

-

-

7-365 days

INR200

IND A1+

Affirmed

*Yet to be issued

^Details are provided in Annexure

Ind-Ra has taken a consolidated view of BOB and its subsidiaries while arriving at the ratings.


The Long-Term Issuer Rating reflects BOB’s high systemically important position, and hence, a high probability of support from the government of India (GoI; 1HFY19: 64%) if required. The ratings also take into account BOB’s large franchise with pan India presence, adequate funding base and comfortable liquidity. The bank’s asset quality is modest with high delinquencies than similar rated banks.


BOB had total deposit market share of 5.3% at end-March 2018 (FY17: 6.0%). The bank’s share would further expand with the proposed merger with Dena Bank and Vijaya Bank. The bank has the fourth-largest network of 5,534 domestic branches at end-September 2018. Its strong network presence is reflected in BOB having a 4.8% market share of low cost current account savings account deposits (CASA) in FY18, ranking third among public sector banks (PSBs) and sixth overall.


The rating of Basel 3 compliant tier 2 bonds is equalised to the bank’s long term issuer rating.

The rating on BOB’s AT1 bonds reflects the bank’s standalone credit profile, along with its ability to service coupons and manage principal write-down risk over the Basel III transition period. For AT1 instruments, the agency considers discretionary component, coupon omission risk and write-down/conversion risk as key parameters to arrive at a 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.  

KEY RATING DRIVERS

Strong Capitalisation: BOB continues to be among the better capitalised PSBs, with common equity tier 1 of 9.05% in 1HFY19 (FY18: 9.23%). The bank’s capitalisation could strengthen further if it manages its risk weights and growth, and increases its profitability. However, the impact of the merger on capitalisation is yet to be assessed. The bank also has an option to raise capital by monetising non-core assets, planned over FY19-FY20, to support its capital requirements. The bank is well-placed to gain market share in the current environment, where a sizeable proportion of banks and non-banking financial companies are struggling. Also, among the public sector banks, BOB is better placed to raise equity from the capital market.

Standalone Credit Profile Compares Well with Peers’; Impact of Merger Unclear: BOB’s gross non-performing assets (NPAs) marginally declined to 11.78% in 1HFY19 (FY18: 12.26%), aided by National Company Law Tribunal recoveries, while net NPAs declined to 4.86% in 1HFY19 (FY18: 5.49%). The bank’s provision coverage excluding technical write-offs was about 62% in 1HFY19, higher than most of its peers. Ind-Ra expects NPAs to remain elevated mainly on account of aging of net performing loans in FY19; credit costs in FY19 are expected to be around 1.5-2%, lower than observed in FY18 (3.5%) and FY17 (1.9%) if the impact of impending bank merger is ignored. The agency does not expect a significant increase in slippages other than in the normal course of business. In addition, BOB’s improving pre-provision profitability and strong capitalisation provide additional comfort against the expected high credit costs.

 

The BOB-Dena-Vijaya merger could result in harmonisation of asset recognition. Although Vijaya Bank’s standalone profile and financial metrics seem better than most PSBs, its liquidity position is weaker with the highest asset funding gaps in the short term. Dena Bank has among the highest gross NPAs and the Reserve Bank of India has instructed the bank to not lend incrementally. In addition, Dena Bank has large asset funding gaps. The combined effects on the merger could be marginally negative, but unlikely to impact BOB’s credit profile materially.

Increased Focus on Granulation of Advances to Accrue Benefit: With BOB’ increased focus on retail assets, liabilities and higher rated corporates, the bank’s retail assets increased 34.84% in FY18 and 21% in 1HFY19 (annualised) with bank credit growth of 18% and 20.74%, respectively, and now constitutes 21% of the total domestic advances. Retail term liabilities constitute about 80% of the total term deposits in 1HFY19 (FY16: 70%). The bank’s exposures rated ‘A’ and above increased to 55.7% in 1HFY19 (1HFY18: 43%). Given that most PSBs are either under prompt corrective action or capital conservation mode, BOB is in a position to command pricing power, and therefore could witness a further improvement in its operating performance. In 1HFY19, the bank reported a net profit of about INR 9.5 billion, despite provisions on investment of about INR11 billion and credit costs of about INR32 billion.

 

During 1HFY19, margins increased to 2.61% from 2.43% in FY18, driven by continuous improvement in the loan book mix and reduction in cost of deposits, partially offset by declining yields as the bank originates higher rated loan assets.

Comfortable Liquidity: BOB’s cumulative one-year funding gap as a percentage of assets deteriorated to about 3.35% as a percentage of total assets in FY18 (FY17: surplus of  3.94% as a percentage of total assets). Ind-Ra expects the bank’s funding gap to widen further on the proposed merger unless the banks change their liability structure. However, BOB had a comfortable liquidity coverage ratio of 140.03% and statutory liquidity ratio of 30.24% in 1HFY19.


RATING SENSITIVITIES

Negative: The Basel III Tier 2 bond rating is linked to BOB’s Long-Term Issuer Rating, which has been derived from the bank’s strong standalone credit profile and Ind-Ra’s expectation of support from the GoI, and is unlikely to change, unless there is a change in the GoI’s support stance.

The rating of AT1 bonds has been notched down from the standalone rating, which could be downgraded in case of a significantly higher-than-expected decline in asset quality, if not buffered by timely equity support, leading to a significant dilution in the bank’s capability to absorb losses. 


COMPANY PROFILE

As of March 2018, BOB had a network of 5,467 branches and 9,704 ATMs and cash recyclers. At FYE18, the bank had share of 5.1% in the advances market.


FINANCIAL SUMMARY


Particulars

FY18

FY17

Total assets (INR billion)

7,200

6,949

Total equity (INR billion)

434

403

Net income/loss (INR billion)

-24.32

13.83

Return on average assets (%)

-0.34

0.20

Equity/assets (%)

6.03

5.80

Capital adequacy ratio (%)

12.13

12.24

Source: Company, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

14 June 2018

22 March 2018

21 October 2016

Issuer rating

Long-term/Short-term

-

IND AAA/Stable/IND A1+

IND AAA/Stable/IND A1+

IND AAA/Stable/IND A1+

IND AAA/Stable/IND A1+

Debt programme

Short-term

-

IND A1+

IND A1+

IND A1+

IND A1+

Fixed deposit

Long-term

-

IND tAAA/Stable

IND tAAA/Stable

IND tAAA/Stable

IND tAAA/Stable

Basel III Tier 2 instrument*

Long-term

INR15

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

-

Basel III AT1 bonds

Long-term

INR65

IND AA+/Stable

IND AA+/Stable

IND AA+/Stable

IND AA+/Stable

Certificate of deposits

Short-term

INR200

IND A1+

IND A1+

IND A1+

 

*Yet to be issued

ANNEXURE

Issue Name/Type

ISIN

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

Additional Tier-1 Basel III bonds Series V

INE028A08075

9 January 2015

9.48

Perpetual

INR10.00

IND AA+/Stable

Additional Tier-1 Basel III bonds Series VI

INE028A08083

2 December 2016

8.5

Perpetual

INR10.00

IND AA+/Stable

Additional Tier-1 Basel III bonds Series VII

INE028A08091

22 March 2017

9.14

Perpetual

INR10.00

IND AA+/Stable

Additional Tier-1 Basel III bonds Series VIII

INE028A08109

1 August 2017

8.6

Perpetual

INR5.00

IND AA+/Stable

Additional Tier-1 Basel III bonds Series IX

INE028A08117

11 August 2017

8.65

Perpetual

INR8.50

IND AA+/Stable

Total unutilised

INR21.50

Total

INR65.00


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

About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

Headquartered in Mumbai, Ind-Ra has seven branch offices located in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad, Kolkata and Pune. Ind-Ra is recognised by the Securities and Exchange Board of India, the Reserve Bank of India and National Housing Bank. 

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For more information, visit www.indiaratings.co.in.

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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

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121