Rating Rationale
September 09, 2020 | Mumbai
Bank of Maharashtra
Ratings Reaffirmed; Upper Tier-II Bonds & Perpetual Tier-I Bonds (under Basel II) Withdrawn
 
Rating Action
Lower Tier-II Bonds (Under Basel II) Aggregating to Rs.1000 Crore CRISIL A+/Stable (Reaffirmed)
Rs.400 Crore Upper Tier-II Bonds (under Basel II) CRISIL A/Stable (Withdrawn)
Rs.70 Crore Perpetual Tier-I Bonds (under Basel II) CRISIL A/Stable (Withdrawn)
Rs.1500 Crore Certificate of Deposits CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A+/Stable/CRISIL A1+' ratings on the Rs 1,000 crore lower Tier-II bonds (under Basel II) and Rs 1,500 crore certificates of deposit of Bank of Maharashtra (BoM). CRISIL has also withdrawn its rating on the Rs 70 crore perpetual Tier-I bonds (under Basel II) and Rs 400 crore upper Tier-II bonds (under Basel II) as both of these instruments have been redeemed. The withdrawal is in line with CRISIL's policies.
 
The ratings continue to factor in the expectation of strong support from the majority owner, Government of India (GoI), and a comfortable resource profile. These strengths are partially offset by a modest, albeit improving, asset quality and earnings profile, and high regional concentration in operations.
 
The nationwide lockdown, imposed by the government to contain the spread of the Covid-19 pandemic has impacted disbursements and collections of financial institutions. The lockdown has now been extended in containment zones, while earlier prohibited activities are being opened in a phased manner in other areas. However, certain states have implemented localised lockdowns. Eventual lifting of restrictions should continue to be in a phased manner. Any delay in return to normalcy will put further pressure on collections and asset quality metrics of lenders.
 
The bank has provided moratorium to its borrowers in line with the relief measures provided by the Reserve Bank of India (RBI) and around 24% of the portfolio in terms of value was under moratorium as on June 30, 2020. Any change in behaviour of borrowers with respect to payment discipline can affect asset quality levels post the moratorium. Also, while the one-time restructuring scheme announced by RBI will aid in providing necessary support to affected borrowers in the current environment, the details and operational implementation of the scheme will have to be seen.
 
Given this, gross non-performing assets (NPAs) could increase, leading to higher credit cost and thereby impacting profitability; this will remain a key monitorable.

Analytical Approach

For arriving at the ratings, CRISIL has considered the standalone business and financial risk profiles of BoM. CRISIL has also factored in the strong support expected from the majority owner, GoI, both on an ongoing basis and in the event of distress.

Key Rating Drivers & Detailed Description
Strengths:
* Expectation of strong support from the government (GoI)
In its ratings on PSBs, CRISIL continues to factor in strong support from GoI, which is both the majority shareholder 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 severe implications of failure of any PSB 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 BoM.
 
As a part of the Indradhanush framework, the government had pledged to infuse at least Rs 70,000 crore in PSBs during 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; BoM received Rs. 3,487 crore in fiscal 2018 and Rs 4,703 crore in fiscal 2019 under this package. Also, GoI allocated Rs 70,000 crore in fiscal 2020, of which Rs 963 crore was received. Thus, over the past three fiscals, the government has infused around Rs 9,153 crore in the bank.  Consequently, as on March 31, 2020, the Tier 1 and total capital adequacy ratios (CARs) improved to 10.67% and 13.52%, respectively, from 9.00% and 11.00%, respectively, as on March 31, 2018.
 
* Comfortable resource profile
The bank had a large proportion of low-cost current account and savings account (CASA) deposits, at 49.56% of total deposits as on June 30, 2020 (48.08% as on June 30, 2019). Furthermore, total retail deposits constituted a significant proportion of total deposits. Consequently, cost of deposits remained low at 4.44% annualised (reported) for the quarter ended June 30, 2020.
 
Weaknesses:
* Modest, albeit improving, asset quality and earnings profile
Asset quality, while remaining weak, improved with gross NPAs declining to 10.9% as on June 30, 2020 (12.8% as on March 31, 2020) from 16.4% as on March 31, 2019. This was supported by large write-offs during the period. On an absolute basis, gross NPAs stood at Rs 10,559 crore as on June 30, 2020.
 
Slippages, while declining, remain high at 4.9% for fiscal 2020 as compared with 5.0% in the previous fiscal.  Further, for the quarter ended June 30, 2020, slippages were significantly lower at Rs 105 crore due to the moratorium and the standstill on asset classification. However, given the current challenging macro environment and the one-time restructuring scheme proposed by RBI, asset quality will remain a monitorable.
 
In line with trends seen in asset quality, the earnings profile improved, primarily due to lower provisioning costs with a substantial amount of the provisioning cover build-up having been done in fiscal 2019. However, it is modest and could be under pressure in the current environment. Net profit was Rs 389 crore in fiscal 2020, supported by tax write-back, as against a net loss of Rs 4,784 crore in fiscal 2019. Credit costs declined significantly to 1.86% in fiscal 2020 from 4.57% in the previous fiscal. Consequently, return on assets improved to 0.23% from a negative 3.01%. Net profit was Rs 101 crore for the quarter ended June 30, 2020, supported by treasury profits of Rs 145 crore. However, the ability to sustain and improve operating profits and also contain credit costs will remain a key monitorable.
 
* High regional concentration in operations
Operations are concentrated in Maharashtra, which accounted for 75% of the deposits and 62% of the advances as on June 30, 2020. While the bank has been opening branches outside the state, concentration risk is likely to reduce only in the long term.
Liquidity Strong

Liquidity is supported by a strong retail deposit base that forms a significant part of the total deposits. The liquidity coverage ratio was 232.33% as on June 30, 2020, against the regulatory requirement of 80%. The excess statutory liquidity ratio, which further cushioned liquidity, was Rs 10,259 crore (6.5% of net demand and time liabilities) as on June 30, 2020. Liquidity also benefits from access to systemic sources of funds such as the liquidity adjustment facility from RBI, access to the call money market, and refinance limits from sources such as National Housing Bank and National Bank for Agriculture and Rural Development.

Outlook: Stable

CRISIL believes BoM will continue to benefit from strong government support and maintain a comfortable resource profile. However, asset quality and earnings profile may remain under pressure in the medium term.

Rating Sensitivity factors
Upward factors:
* Substantial and sustained improvement in asset quality
* Higher profitability, leading to return on assets remaining positive (above 0.1%) on a steady-state basis
 
Downward factors:
* Material change in expectation of government support
* A decline in CAR below minimum regulatory requirements (including capital conservation buffer, which was 9.5% for Tier I and 11.5% overall as on March 31, 2020) over an extended period
About the Bank

BoM is a medium-sized PSB, with assets of Rs 1,81,671 crore, and a network of 1,833 branches and 1,819 automated teller machines (ATMs) as on June 30, 2020; 57% of the branches are in rural and semi-urban areas. With deposits of Rs 1,52,987 crore and advances of Rs 96,621 crore, the bank had a market share of around 1% each in deposits and advances, in the banking system, as on June 30, 2020. Tier I, and overall CAR stood at 10.23% and 13.21%, respectively, as on June 30, 2020 (10.67% and 13.52%, respectively, as on March 31, 2020).
 
Profit after tax (PAT) was Rs 101 crore on a total income (net of interest expense) of Rs 1,457 crore for the quarter ended June 30, 2020, as against a PAT of Rs 81 crore on a total income (net of interest expense) of Rs 1,416 crore, for the corresponding period of the previous fiscal. Net profit was Rs 389 crore on a total income (net of interest expense) of Rs 5,928 crore in fiscal 2020 as against a net loss of Rs 4,784 crore and total income of Rs 5,281 crore, in the previous fiscal.  

Key Financial Indicators
As on/for the period ended June 30 Unit 2020 2019
Total assets Rs crore 181671 155800
Total income Rs crore 3265 3192
PAT Rs crore 101 81
Gross NPA % 10.93 17.90
Overall capital adequacy ratio  % 13.21 11.69
Return on assets (annualised) % 0.23 0.20

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of
Allotment		 Coupon
Rate (%)		 Maturity
Date		 Issue Size
(Rs Crore)		 Complexity Levels Outstanding rating
with Outlook
INE457A09199 Lower Tier-II Bonds
(under Basel II)		 31-Dec-12 9.00 31-Dec-22 1000.00 Complex CRISIL A+/Stable
NA Certificates of Deposit NA NA 7-365 Days 1500.00 Simple CRISIL A1+
 
Annexure - Details of Rating Withdrawn
ISIN Name of Instrument Date of
Allotment		 Coupon
Rate (%)		 Maturity
Date		 Issue Size
(Rs Crore)		 Complexity
Levels
INE457A09165* Perpetual Tier-I Bonds (under Basel II) 30-Sep-09 9.25 Perpetual 70.00 Highly Complex
INE457A09157* Upper Tier-II Bonds (under Basel II) 30-Sep-09 8.95 30-Sep-24 100.00 Highly Complex
INE457A09173 Upper Tier-II Bonds (under Basel II) 1-Feb-10 8.65 1-Feb-25 300.00 Highly Complex
*The bank has exercised call option on these bonds; due date of call option 30th-Sep-2019
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Certificate of Deposits  ST  1500.00  CRISIL A1+      30-08-19  CRISIL A1+  31-08-18  CRISIL A1+  30-08-17  CRISIL A1+  CRISIL A1+ 
                25-01-18  CRISIL A1+       
Lower Tier-II Bonds (under Basel II)  LT  1000.00
09-09-20 		 CRISIL A+/Stable      30-08-19  CRISIL A+/Stable  31-08-18  CRISIL A+/Stable  30-08-17  CRISIL A+/Negative  CRISIL AA-/Negative 
                25-01-18  CRISIL A+/Stable       
Perpetual Tier-I Bonds (under Basel II)  LT  0.00
09-09-20 		 Withdrawn      30-08-19  CRISIL A/Stable  31-08-18  CRISIL A/Stable  30-08-17  CRISIL A/Negative  CRISIL A+/Negative 
                25-01-18  CRISIL A/Stable       
Tier I Bonds (Under Basel III)  LT    --    --    --  31-08-18  Withdrawal  30-08-17  CRISIL BBB+/Negative  CRISIL A-/Negative 
                25-01-18  CRISIL BBB+/Negative       
Upper Tier-II Bonds (under Basel II)  LT  0.00
09-09-20 		 Withdrawn      30-08-19  CRISIL A/Stable  31-08-18  CRISIL A/Stable  30-08-17  CRISIL A/Negative  CRISIL A+/Negative 
                25-01-18  CRISIL A/Stable       
All amounts are in Rs.Cr.
Links to related criteria
Rating Criteria for Banks and Financial Institutions
Criteria for Notching up Stand Alone Ratings of Entities Based on Government Support
Rating criteria for Basel III - compliant non-equity capital instruments

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