Rating Rationale

Strengths
* Strong expectation of support from the government: The ratings continue to factor in expectation of strong government support, both on an ongoing basis and in the event of distress. This is because the government 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, 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. Majority ownership creates a moral obligation on the government to support PSBs, including BoI. As part of the Indradhanush framework, the government has pledged to infuse at least Rs 70,000 crore in PSBs between fiscals 2015 and 2019, of which Rs 25,000 crore each was infused in fiscals 2016 and 2017. Furthermore, in October 2017, the government outlined recapitalisation package of Rs 2.11 lakh crore over fiscals 2018 and 2019, of which PSBs received Rs 88,139 crore in fiscal 2018. BoI received its allocated Rs 9232 crore out of this in fiscal 2018.

* Established market position: BoI is the fifth-largest government-owned bank with total assets of Rs 5,96,098 crore as on June 30, 2018 (Rs. 6,09,574 crore as on March 31, 2018). National presence gives it 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.

* 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 41.8% of total domestic deposits as on June 30, 2018 (41.3% as on March 31, 2018), compared to 39.8% as on March 31, 2017. The cost of deposits remains lower than the industry average. Additionally, the bank has a sizeable international presence (around 20% of total deposits as on June 30, 2018), which supports resource profile.

Weakness
* Weak asset quality: Asset quality has remained under stress with gross non-performing assets (NPAs) at 16.7% as on June 30, 2018 (16.6% as on March 31, 2018, and 13.2% as on March 31, 2017). Asset quality weakened mainly due to higher slippages in the large and medium corporate advances portfolio, especially in the infrastructure and iron and steel exposures, which stood at 15.0% and 4.0%, respectively, of the total domestic advances as on March 31, 2018 (15.7% and 4.1%, respectively, as on March 31, 2017). While the corporate loan book contributes the most to gross NPAs, the performance of the rest of the book (including MSME [micro, small, and medium enterprise], retail, and agriculture) has also weakened with GNPAs for these segments increasing both sequentially and over the previous year. Ability to arrest slippages and affect recovery, mainly in the corporate and MSME loan book, will remain a key rating monitorable in the near term.

* Weak earnings: Earnings has weakened considerably in the past few years on account of high credit cost and subdued growth in loan book. Provisioning cost increased to 2.6% for fiscal 2018 from 2.0% for fiscal 2017 (1.7% for the quarter ended June 30, 2018, against 1.5% 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 also declined to 1.2% for fiscal 2018 from 1.6% for fiscal 2017 due to high interest reversal on NPAs, weak loan growth, and lower other income (1.2% for the quarter ended June 30, 2018). Return on assets (RoA) was 0.06% for the quarter ended June 30, 2018, against 0.05% for the corresponding period of the previous fiscal (RoA was negative 2.4% for fiscal 2018 against negative 0.24% for fiscal 2017). Nevertheless, provisioning coverage ratio (PCR) increased to 54.0% as on June 30, 2018 from 52% a year ago. The bank's ability to improve operating profits and contain credit costs will remain a key monitorable over the medium term.

Outlook: Stable (Tier II Bonds [under Basel III], Upper Tier-II Bonds, and Perpetual Tier-I Bonds [under Basel II])
CRISIL believes BoI will continue to benefit from strong government support, especially given the recent recapitalisation announcement. Asset quality and earnings are, however, expected to remain under pressure over the medium term.

Upward scenario:
* Substantial and sustained improvement in asset quality and earnings

Downward scenario:
* More-than-expected deterioration in asset quality or earnings