Strengths * Strong expectation of support from Government of India (GoI) The ratings continue to factor in an expectation of strong government support, both on an ongoing basis and in the event of distress. This is because GoI is both the majority shareholder in PSBs and the guardian of India's financial system. The stability of the banking sector is of prime importance to GoI, given the criticality of the sector to the economy, the strong public perception of sovereign backing for PSBs and the severe implications of any PSB failure in terms of political fallout, systemic stability and investor confidence in public sector institutions. CRISIL believes that the majority ownership creates a moral obligation on GoI to support the PSBs included BoB. As a part of 'Indradhanush' framework, government has pledged to infuse at least Rs 70,000 crore in PSBs during fiscal 2015 to 2019, of which Rs 25,000 crore each was infused in fiscal 2016 and fiscal 2017. Further in October 2017, the government had outlined a recapitalisation package of Rs 2.11 lakh crores over fiscals 2018 and fiscal 2019, out of which PSBs received Rs 88,139 crore from the government in fiscal 2018. The government allocated Rs 70,000 crore for capital infusion in fiscal 2020 out of which Rs 55,250 crore was proposed to be infused in the 10 merged PSBs. BoB was allocated Rs 5375 crore in fiscal 2018 and Rs 7,000 crore in fiscal 2020. CRISIL believes that GoI will continue to provide distress support to all PSBs including BoB and will not allow any of them to fail. It will also support them in meeting Basel III capital regulations.
* Established franchise and strong market position in the Indian banking sector Currently BoB is among India's five largest banks by asset size with total assets of Rs 10,72,753 crore as on September 30, 2019 (Rs 10,81,909 crore as on April 1, 2019) and had a share of around 5.1% of domestic banking system's assets end March 31, 2019. BoB had a share of around 6.3% and around 6.1% in the industry's deposits and advances, respectively on same date. It is one of the most geographically diversified PSBs with international presence spanning across 100 offices in 21 countries and bank's international operations contributing to 14% of total business as on September 30, 2019 (14% end March 31, 2019 for amalgamated entity and 21% as on September 30, 2018 for solo entity).
As on September 30, 2019, the bank's net advances stood at Rs 6,37, 340 crore, up 2.9% Y-o-Y, of which 84% were domestic while the remaining 16% were international loans. Overall, the share of domestic loans in the total loans has been on a rise. End H1 fiscal 2020, the domestic advances stood at 533,174 crore, up 1.9% Y-o-Y driven by strong growth in retail loans, particularly the home loan portfolio. On the other hand, the relatively low-yield international loan portfolio continued to sequentially contract and stood at Rs 104,166 crore, up 8.6% Y-o-Y.
* Adequate capitalisation BoB remains adequately capitalized with Tier I and overall CAR (under Basel III) at 10.91% and 12.98% respectively as on September 30, 2019 (9.72% and 11.77% respectively as on April 1, 2019). The bank's networth coverage for net NPA improved to 2.57 times as on September 30, 2019, up from 2.38 times as on March 31, 2019. BoB has also reported profits during H1 fiscal 2020. CRISIL believes that BoB will be able to maintain adequate capitalisation over the medium term, backed by capital support from GoI.
* Stable resource profile BoB has a large, stable and diversified resource profile. The bank has a large deposit base that grew by 2.1% Y-o-Y to Rs 8,94,130 crore as on September 30, 2019 (Rs 915,159 crore as on March 31, 2019). Owing to strong international presence, BoB generates about 12% of its deposits from overseas that adequately support and provide geographical diversity to the bank's resource profile. Overall, the bank's current and savings account (CASA) deposits grew by 5.98% Y-o-Y translating into CASA ratio of 34.9% as on September 30, 2019 (34.02% as on March 31, 2019). With high share of CASA deposits, the bank has been able to keep its costs of deposits under control. The annualized cost of deposits for the half year ending September 30, 2019 stood at 5%, slightly up from 4.9% for the corresponding period last year.
However, overall CRISIL believes that BoB will maintain an adequate resource profile over the medium term given its well spread branch network, diversified investor base and access to international deposits.
Weaknesses * Modest asset quality BoB's asset quality, though marginally improving, remains modest with reported gross NPA at 10.25% as on September 30, 2019 up from 10.02% as on March 31, 2019. The absolute quantum of GNPA stood at Rs 69,969 crore as on September 30, 2019 (up from Rs 69,924 crore as on March 31, 2019). With improvement in provision coverage, the net NPA ratio stood at 3.91% as on September 30, 2019 (3.65% as on March 31, 2019). End September 30, 2019, the CRSIL adjusted provision coverage ratio (PCR) stood at around 64% (66% as on March 31, 2019, which was one of the highest among PSBs. The slippages for the half year ending September 30, 2019 stood at Rs 13,883 crore translating into annualized slippages ratio of 3.9% (down from 4.9% in fiscal 2019). The bank's exposure to NCLT accounts stood at a total of Rs 49,798 crore as on September 30, 2019 with an average provision coverage of about 87%. While the bank is working on stabilising and improving its asset quality, BoB's ability to contain slippages and ensure recoveries in a sustainable manner remain some of the key rating monitorables.
* Modest profitability for the rating category Over the last few years, BoB's profitability has been impacted by asset quality pressures and has remained modest for its rating category. For the half year ending September 30, 2019, the bank reported return on average assets (annualised) at 0.27%. The improvement was driven by margin expansion amid lower cost of funds, as well as by controlled credit costs. The bank has been taking steps to improve pre-provisioning profitability, such a focus on higher margin business, increase its digital footprint, and growing its fee based income. However, some of these measures could yield results over a longer period. The ability to sustain and improve profitability hereon would remain a monitorable.
Liquidity Superior The Liquidity Coverage Ratio of the Bank stood at 125% as on March 31, 2019, as against statutory minimum of 100% from January 1, 2019. The bank's liquidity also benefits from access to systemic sources of funds, such as the liquidity adjustment facility from RBI and access to the call money market.
Outlook: Stable the Tier II Bonds (under Basel III), Lower Tier-II bonds (under Basel II), Tier-I Perpetual Bonds (under Basel II) and Upper Tier II Bonds (under Basel II) CRISIL believes that BoB will continue to benefit from strong support from GoI. The bank's asset quality and earnings profile are however, expected to remain modest over the medium term.
Rating Sensitivity Factors Downward Factors *Increase in slippages resulting in Gross NPA ratio rising above 12%. *Significant deterioration in earnings profile.
Outlook: Negative on the Tier-I Bonds (under Basel III) CRISIL believes that the earnings profile will remain modest over the medium term and consequently the Bank's eligible reserves ratio will remain at current levels.
Rating Sensitivity Factors Upward factors *If the eligible reserves to total assets ratio increases to above 4%
Downward Factors *If there is no material improvement in the eligible reserves to total assets ratio from current levels. *Downward revision in Tier-II bonds will result in corresponding change in rating of Tier-I bonds (under Basel III).
About the Bank Incorporated in 1908 as a privately owned institution headquartered in Vadodara, BoB expanded its operations through mergers and acquisitions before being nationalized in 1969. GoI shareholding in BoB stood at 69.23% as on September 30, 2019. Presently, BoB is amongst the five largest banks in India with a domestic branch network of 9449 branches, of which 58% are located in rural and semi urban areas. BoB also has a large international presence amongst Indian banks with 100 overseas offices across 21 countries.
|