Rating Rationale

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 recapitalization 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. BoB was allocated Rs 5375 crore in fiscal 2018. 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 741,434 crore as on September 30, 2018 (Rs 719, 999 crore as on March 31, 2018 and Rs 676,916 crore as on September 30, 2017) and had a share of around 5.1% of domestic banking system's assets end March 31, 2018. BoB had a share of around 5.1% and around 5.7% 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 103 offices in 22 countries and bank's international operations contributing to 21% of total business as on September 30, 2018 (22% end March 31, 2018 and 25% as on September 30, 2017).

As on September 30, 2018, the bank's net advances stood at Rs 433,549 crore, up 11.9% Y-o-Y, of which 78% were domestic while the remaining 22% were international loans. Overall, the share of domestic loans in the total loans has been on a rise. End H1 fiscal 2019, the domestic advances stood at 365,261 crore, up 20.7% 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 103,479 crore, down 8.9% Y-o-Y.

With the proposed merger of BoB, Vijaya and Dena, the combined entity would become the second largest public sector bank (behind State Bank of India) and have total assets of Rs 10.5 lakhs crore as on September 30, 2018 constituting 7.2% of domestic system's assets. The combined entity would have net advances and deposits of about Rs 6.2 lakh crore and 8.7 lakh crore respectively as on September 30, 2018 and would become more geographically diversified with about 9,500 branches.

* Adequate capitalization
BoB remains adequately capitalized with Tier I and overall CAR (under Basel III) at 10.25% and 11.88% respectively as on September 30, 2018 (10.46% and 12.13% respectively as on March 31, 2018 and 9.61% and 11.64% respectively as on September 30, 2017). The GoI's ownership, at 63.74% as on September 30, 2018 provides moderate flexibility to raise equity by diluting GoI's stake over the medium term. Owing to sequential contraction in net non-performing assets (NPA) registered over last two quarters, the bank's networth coverage for net NPA improved to 2.15 times as on September 30, 2018, up from 1.85 times as on March 31, 2018 and 2.09 times as on September 30, 2017. Accordingly, CRISIL believes that BoB will be able to maintain adequate capitalization over the medium term, backed by capital support from GoI. For the merged entity, we expect capitalization to remain adequate with overall CAR at around 12%

* Adequate resource profile
BoB has a large, stable and diversified resource profile. The bank has a large deposit base that grew by 4.0% Y-o-Y to Rs 606,973 crore as on September 30, 2018 (Rs 591,315 crore as on March 31, 2018). Owing to strong international presence, BoB generates about 20% 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 10% Y-o-Y translating into CASA ratio of 35.3% as on September 30, 2018 (35.8% as on March 31, 2018 and 33.4% as on September 30, 2017). 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, 2018 stood at 4.4%, slightly down from 4.5% for the corresponding period last year.

For the merged entity, we expect CASA ratio to remain at around 34% driven by comfortable CASA ratios for BoB and Dena Bank though partially offset by the lower CASA ratio of Vijaya (23% as on September 30, 2018) 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 11.78% as on September 30, 2018 down from 12.26% as on March 31, 2018. The absolute quantum of GNPA stood at Rs 55,121 crore as on September 30, 2018 (down from Rs 56,480 crore as on March 31, 2018). With improvement in provision coverage, the net NPA ratio improved to 4.86% as on September 30, 2018 (5.49% as on March 31, 2018 and 5.05% as on September 30, 2017). End September 30, 2018, the CRSIL adjusted provision coverage ratio (PCR) stood at around 62%, up from 59% as on March 31, 2018, which was the highest among the PSBs. The slippages for the half year ending September 30, 2018 stood at Rs 8,058 crore translating into annualized slippages ratio of 3.4% (down from 6.3% in fiscal 2018). The bank's exposure to NCLT accounts stood at a total of Rs 21,985 crore as on September 30, 2018 with an average provision coverage of about 66%. While the bank is working on stabilizing and improving its asset quality, the BoB's ability to contain slippages and ensure recoveries in a sustainable manner remain some of the key rating monitorables.

End September 30, 2018, Dena and Vijaya reported gross GNPA of 23.64% and 5.86% respectively. With BoB constituting almost 70% of merged entity's advances and assets, the asset quality metrics of BoB are likely to be similar to the merged entity with latter's GNPA ratio at around 12.4% on the same date.

* 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, 2018, the bank reported return on average assets (annualised) at 0.26% compared to -0.34%% in fiscal 2018 and 0.16% in the first half of fiscal 2018. The improvement was driven by margin expansion amid lower cost of funds, as well as by controlled credit costs with provisions during the half year down 2% Y-o-Y. However, as the policy rates rise, the cost of funds would also inch up thereby pressuring margins. The bank has been taking steps to improve 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.

For the merged entity, the annualised RoAA for the half year ending September 30, 2018 is expected to be subdued at around 0.02% underpinned by weak earnings profile of Dena.

Liquidity Profile
The banks liquidity is comfortable supported by strong retail deposit base. The Liquidity Coverage Ratio of the bank stood at 135% as on June 30, 2018, 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.

Downside Scenario
* Further significant deterioration in its asset quality or earnings profile

Outlook: Negative on the Tier-I Bonds (under Basel III)
CRISIL believes that the expected stress in BoB's asset quality over the medium term could impact the bank's eligible reserves position.

Downside Scenario
* The rating may be downgraded in case of significant deterioration in eligible reserves position. The rating may also be downgraded if there is further significant deterioration in its asset quality or earnings profile.

Upside Scenario
* CRISIL is evaluating the flexibility with banks to set off any accumulated losses with the bank's balance in share premium account. Clarity on the same is likely to have positive implication on the availability of eligible reserves to service Basel III Tier-I coupon payments and thereby the rating on the instruments.