Rating Rationale

Strengths
* Strong expectation of support from the government:
The rating continues to factor in 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 public sector banks (PSBs), and the guardian of India's financial system. Stability of the banking sector is of prime importance to the government, given the criticality of the sector to the economy, the strong public perception of sovereign backing for PSBs, and severe implications of any PSB's failure, in terms of political fallout, systemic stability, and investor confidence in public sector institutions. The majority ownership creates a moral obligation on GoI to support PSBs, including BoI.

As part of the Indradhanush framework, the government had pledged to infuse at least Rs 70,000 crore in PSBs over fiscals 2015 to 2019, of which Rs 25,000 crore each was infused in fiscals 2016 and 2017. Further, in October 2017, the government had outlined a recapitalisation package of Rs 2.11 lakh crore over fiscals 2018 and 2019; BoI received capital infusion of Rs 9,232 crore and Rs 14,724 crore in fiscal 2018 and fiscal 2019, respectively.

* Established market position: BoI is the fifth-largest government-owned bank with total assets of Rs 606,543 crore as on June 30, 2019 (Rs 6,25,223 crore as on March 31, 2019). National presence gives the bank the benefit of a wide distribution network and access to retail depositors. Downsizing of the corporate loan book has resulted in some reduction in market share in the past two years. While pressure on market position may persist in the near term, it should stabilise over the medium term, backed by BoI's extensive branch network and also given that bank is now out of PCA framework.

*Comfortable resource profile: Resource profile is supported by a large deposit base and a comfortable low-cost deposit mix, driven by strong presence in rural and semi-urban areas. Domestic low-cost current account and savings account deposits stood at 43.1% of total domestic deposits as on June 30, 2019 (43.4% as on March 31, 2019), compared to 41.8% as on June 30, 2018. Cost of deposits remains lower than the industry average.The bank's sizeable international presence (16.6% of total deposits as on June 30, 2019), also supports the resource profile.

Weaknesses
* Weak asset quality: Asset quality has been under stress, with gross non-performing assets (NPAs) at 16.5% as on June 30, 2019 (15.8% as on March 31, 2019, and 16.6% as on March 31, 2018). While the corporate book NPAs contributes to most of the gross NPAs, performance of the rest of the book (including MSME [micro, small, and medium enterprise] and agriculture) has also weakened, with GNPAs for these segments increasing both sequentially and over the previous year. Ability to arrest slippages and increase recoveries will remain a key rating monitorable.

* Weak earnings: Earnings have weakened considerably in the past few years, due to high credit cost and subdued growth in loan book. Provisioning cost increased to 2.7% for fiscal 2019, from 2.6% for fiscal 2018 (1.2% annualised for the quarter ended June 30, 2019, against 1.7% annualised for the corresponding period of the previous fiscal). Credit cost remained high due to elevated slippages and ageing of NPAs. The pre-provision profit, as a proportion of average assets, was also low at 1.3% for fiscal 2019 (1.2% for fiscal 2018) due to high interest reversal on NPAs, weak loan growth, and lower other income. BOI posted a PAT of Rs 243 crore for the first quarter of fiscal 2020 (Rs 95 crore for the corresponding period in previous year) as result of lower provisioning cost. Return on assets (RoA) was 0.16% for the quarter ended June 30, 2019, against 0.06% for the corresponding period of the previous fiscal (RoA was negative 0.9% for fiscal 2019 as against negative 1.0% for fiscal 2018). Nevertheless, provisioning coverage ratio¹(PCR) increased to 68.9% as on June 30, 2019 from 53.9% a year ago. The bank's ability to improve operating profit and contain credit cost will remain a key monitorable over the medium term.