BOB Capital Markets Limited

Rating Reaffirmed

 

Rating Action

Corporate Credit Rating

CCR AAA/Stable (Renewed & Reaffirmed)

1 crore = 10 million   

Refer to annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has renewed and reaffirmed its Corporate Credit Rating of BOB Capital Markets Limited (BOBCAPS) at ‘CCR AAA/Stable’. The rating continues to centrally factor in the company’s increasing strategic importance to, and expectation of strong support from, its parent, Bank of Baroda (BoB; rated CRISIL AAA/Stable/CRISIL AA+/Stable[1]). The rating also reflects BOBCAPS’ comfortable capitalisation for current and planned scale of operations. These strengths are partially offset by its small, albeit increasing, scale of operations and modest earnings profile.

[1] Tier I Bonds (under Basel III)

Analytical Approach

For arriving at its rating, CRISIL Ratings has factored in the support that BOBCAPS is expected to receive from its parent, BoB, both on an ongoing basis and in the event of distress.

Key Rating Drivers & Detailed Description

Strengths:

• Expectation of strong support from parent, Bank of Baroda

BOBCAPS is the investment banking and broking subsidiary of BoB. BOBCAPS will receive strong support from BoB given its increasing strategic importance to the latter and strong moral obligation due to 100% ownership and name sharing. While the company’s current scale of operations is small, its strategic importance is increasing with BOBCAPS being developed as a core platform for the fee-based offerings of the bank. A professional management team has been put in place, building capabilities and product offerings in investment banking (IB), wealth management, and broking.

 

Board-level oversight from BoB is expected to remain strong and operational synergies would increase over the medium term. The company’s board of directors comprise senior personnel from BoB (including Mr Sanjiv Chadha, the Managing Director and CEO of BoB as Chairman), and all strategy formulation is at the board level. The Managing Director of BOBCAPS is also deputed by BoB. Operational synergies remain high as a significant portion of the investment banking and debt business is linked to BoB. Incremental sourcing of IB deals is also expected to build upon BoB’s existing corporate relationship. Furthermore, the broking business will primarily serve BoB’s extensive customer base. As BOBCAPS’s retail broking business grows over the medium term, it will primarily leverage upon BoB’s existing branch network. In the wealth management space, the company has hired investment counselors who are working alongside bank’s relationship managers to distribute mutual funds and other financial products and services to the existing customer base.

 

• Comfortable capital position

Capitalisation remains adequate for its current and planned scale of operations. As on June 30, 2021, total networth was Rs 167 crore (Rs 162 crore as on March 31, 2021, Rs 153 crores as on March 31, 2020). The company does not have any debt on its books. Also, while it plans to expand operations, the focus on fee-based business, limits the incremental capital requirement. As the broking business volumes increase, there is likely to be higher funding requirement in the form of deposits with Exchanges. BOBCAPS is expected to fund the same from internal accruals or raise capital from parent. Overall, capitalisation will continue to be supported by flexibility to recapitalise (if needed) from BOB.

 

Weaknesses:

• Small, albeit increasing, scale of operations

Scale has been subdued in the past, with mainly BoB-linked investment banking business and a limited broking presence. However, the company plans to ramp up operations over the medium term. It is building investment banking capabilities and has hired a team of specialist bankers to build product capabilities and acquire new clients.

 

In fiscal 2021, the company showed strong growth in revenues from the investment banking division, primarily debt restructuring. The company leveraged its parent relationship and was the lead consultant for many large entities who underwent restructuring under Reserve Bank of India OTR framework. The Government of India has recently incorporated an asset reconstruction company and an operational management company for aggregating and consolidating stressed assets for their subsequent resolution. This development is also likely to provide a market opportunity for BOBCAPS to further increase its revenues from investment banking division.

 

The institutional broking team has been strengthened with additional resources, especially on the research side. Furthermore, the company also intends to increase their presence in retail broking business and leverage the existing demat account holders of the Bank and is also working on the technology front for enhanced customer experience. However, CRISIL Ratings believes that the broking business environment is highly competitive and requires high technological investment for ease of trading.

 

While BOBCAPS will be able to tap parent’s existing base of clients for its investment banking as well as broking business, and ramp up operations from the current levels, the company’s ability to achieve meaningful scale and manage intense competition will need to be demonstrated.

 

• Modest earnings profile

Earnings profile is underpinned by subdued scale and relatively high cost to income. The company primarily generates revenue from investment banking (both debt and equity) and interest on surplus investments, while broking income forms a smaller proportion of total revenues.

 

In fiscal 2021, the company reported a 31% growth in total revenues (20% growth in previous year). The revenue growth was primarily driven by investment banking, which formed 70% of operating revenues. On the other hand, the company focused on controlling costs – especially employee costs which formed around 67% of total expenses. The company has deferred incentive policy and the same is being followed at the time of booking the expenses related to incentives. Consequently, the company turned profitable in fiscal 2021, after reporting losses in the last few years due to high operating expenses. The company reported a profit after tax (PAT) of Rs 9.3 crore for the period ending March 31, 2021, as compared to loss of Rs 0.8 crore in the last fiscal. Cost to income also reduced to 73.4% in fiscal 2021 from 103.4% in fiscal 2020.

 

During first quarter of fiscal 2022, BOBCAPS continued to report steady revenues and reported PAT of Rs 4.8 crore. The company has completed the employee expansion plans and with scale, the cost to income are expected to further normalize going forward which would aid the profitability metrics.

Liquidity: Superior

Liquidity is adequate for the current scale of operations and associated operating expenses, given the absence of any fund-based borrowing or debt obligation. BOBCAPS avails borrowings on occasions but they are typically 100% backed by fixed deposits. The company maintains surplus liquidity in the form of unencumbered deposits which stood at Rs 32 crore and liquid mutual funds amounting to Rs.4 crore as on June 30, 2021. The company also has overdraft facilities from banks of Rs 24.67 crore, which remain unutilised. In the case of any liquidity requirement or exigency, the company is also expected to receive funding support from parent Bank of Baroda.

Outlook: Stable

CRISIL Ratings believes BOBCAPS will receive strong support from BoB given its increasing strategic importance, 100% ownership, and name sharing. The company’s capital position is also expected to remain comfortable for the nature of the business and proposed scale of operations.

Rating Sensitivity factors

Downward factors

• Downward revision in rating of parent, Bank of Baroda by 1 notch or higher
• Significant diminution in stake held by, or support expected from, Bank of Baroda

About the Company

BOBCAPS, formed on March 11, 1996, is a wholly owned subsidiary of BoB. It is a SEBI (Securities and Exchange Board of India)-registered Category I Merchant Banker and also has a small broking business. The company has presence only in Mumbai via its registered and corporate office. It intends to expand operations and setup offices in other metros.

 

For the fiscal ended March 31, 2021, the company reported a profit of Rs 9.3 crore on total revenue of Rs 46.6 crore, against a loss of Rs 0.8 crore on total revenue of Rs 35.5 crore for the previous fiscal. For the quarter ended June 30, 2021, BOBCAPS reported a profit of Rs 4.9 crore on total revenue of Rs 17.7crore, against a loss of Rs 2.4 crore on total revenue of Rs 5.1 crore for the corresponding quarter last fiscal.

Key Financial Indicators

For the period ending/ As on	Unit	Q1 2022	2021	2020
Total assets	Rs. Cr.	177	176	161
Total income	Rs. Cr.	18	47	36
Profit after tax	Rs. Cr.	4.9	9.3	-0.8
Cost to Income	%	63.5	73.4	103.4
Adjusted gearing	Times	-	-	-
Return on networth	%	11.8*	5.9	-0.5

*Annualized

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs. Crore)	Complexity Level	Rating Assigned with outlook
NA	NA	NA	NA	NA	NA	NA	NA