Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA+/Stable’ rating to the Rs 2,000 crore Tier II bonds (under Basel III) and reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the outstanding Tier II Bonds (under Basel III) and the certificate of deposits of Bank of India (BOI). CRISIL Ratings has also reaffirmed its ‘CRISIL AA/Stable’ rating on the outstanding Tier I Bonds (under BASEL III).

 

The ratings continue to reflect the expectation of strong support from the majority stakeholder, Government of India (GoI), and the established market position and comfortable resource profile of the bank. These strengths are partially offset by weak, albeit improving asset quality and modest earnings profile.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of BOI and all its wholly-owned subsidiaries. CRISIL Ratings has also factored in the strong support that the bank is expected to receive from GoI, both on an ongoing basis and in the event of distress.

 

Please refer Annexure - List of a Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Expectation of strong support from the government

The ratings 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. While the shareholding of GoI declined to ~81% from ~90% post the Rs 2,550 crore qualified institutional placement in August 2021, it remains the majority shareholder. 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 a political fallout, systemic stability, and investor confidence. The majority ownership creates a moral obligation on the government 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 2015-19, of which Rs 25,000 crore each was infused in fiscals 2016 and 2017. Furthermore, in October 2017, the government 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 fiscals 2018 and 2019, respectively. The bank also received capital infusion of Rs 3,000 crore from the government in fiscal 2021.

 

Supported by the regular capital infusion made by the government and higher cash accrual, BOI’s capital ratio is adequate with Tier 1 and overall capital to risk-weighted adequacy ratio of 13.8% and 15.6% respectively, as on June 30, 2023.

 

Established market position

BOI has an established market position, with total assets of Rs 8.2 lakh crore as on June 30, 2023 (Rs 7.4 lakh crore a year back). Presence across the country gives the bank access to a wide distribution network and retail depositors. Gross advances grew by around 13% year-on-year as on March 31, 2023, however has remained flat as on June 30, 2023.

 

The bank had 5,153 branches as on June 30, 2023, including 22 overseas branches. Almost 64% of branches are in rural and semi-urban areas, thereby offering access to low-cost deposits.

 

Comfortable resource profile

The resource profile is supported by a large deposit base and comfortable mix of low-cost deposits, driven by strong presence in rural and semi-urban areas. Domestic, low-cost current account and savings account deposits stood at 44.5% of total domestic deposits as on June 30, 2023 (44.7% as on March 31, 2023 and 43.2% as on March 31, 2022). Share of bulk deposits (>Rs 2 crore) is around 12% of its term deposits as of June 30, 2023. This, along with the high proportion of CASA deposits, enabled the bank to maintain its cost of deposit (CoD) at a competitive level; CoD was 4.1% in the first quarter of fiscal 2024 and 3.6% in fiscal 2023. Significant overseas presence (with foreign branches accounting for 15% of total deposits as on June 30, 2023) also supports the resource profile.

 

Weakness:

Weak, albeit improving asset quality

Gross non-performing assets (NPA) remained elevated at 7.3% as on March 31, 2023. Nevertheless, it has declined from 10.0% as on March 31, 2022 and 13.8% as on March 31, 2021. It has further improved to 6.7% as on June 30, 2023.

 

Improvement in asset quality metric has been largely driven by corporate book where gross NPA improved to 6.5% as on March 31, 2023 (9.7% a year ago). Other segments also witnessed an improvement with gross NPA in the retail, agriculture, micro, small and medium enterprise (MSME) and overseas book at 2.2% (2.6%), 13.0% (13.2%), 14.4% (16.3%) and 4.1% (10.3%) respectively. Restructured book under the Reserve Bank of India’s (RBI’s) resolution framework 1.0 & 2.0 was Rs 7,563 crore (1.5% of gross advances) as on June 30, 2023. The MSME segment accounts for ~33% of the restructured book and performance of the same remains a monitorable.

 

Slippages for fiscal 2023 were 1.9% of opening net advances. The MSME segment accounted for 32% of the overall slippages while corporate including overseas book, retail and agricultural accounted for 23%, 10% and 36%, respectively. Nevertheless, the bank is working on various initiatives to strengthen its collections and recoveries. Ability to arrest slippages while managing collections and asset quality going forward this fiscal, is a key monitorable.

 

Modest earnings, however, on an improving trend

Earnings were weak over fiscals 2016-2020 due to elevated credit cost. However, the bank has been reporting quarterly profits since first quarter of fiscal 2021, supported by a lower credit cost. Earnings were however, impacted in fiscal 2023 due to creation of higher provisions in a few exposures where resolution plan was not implemented within the stipulated time. Hence, RoA remained at 0.5% for fiscal 2023 (0.5% in fiscal 2022), though the pre-provisioning profit / average total assets improved to 1.7% in fiscal 2023 from 1.4% in the previous fiscal. During the first quarter of fiscal 2024, supported by better credit cost and a one-time gain of interest on income tax return, the bank reported a net profit of Rs 1,551 crore with an RoA of 0.8%. Upon adjusting for the one-time gain, the RoA for the quarter stood at 0.5%.

 

The bank’s provision coverage continued to be high at 76.5% as on June 30, 2023 (including technical write-offs, the provision coverage ratio stood at 89.5% as on same date). Ability of the bank to improve operating profit and contain credit cost will remain a key monitorable over the medium term.

Liquidity: Strong

Liquidity is supported by a strong retail deposit base. Liquidity coverage ratio was around 181% for the quarter ended March 31, 2023, as against statutory minimum of 100%. Also, excess over the statutory liquidity ratio stood at 8.0% of the net demand and time liabilities as on June 30, 2023. Liquidity is also aided by access to systemic sources of funds, which include the liquidity adjustment facility from the RBI and the call money market

 

ESG profile

CRISIL Ratings believes the Environment, Social and Governance (ESG) profile of BOI supports its already strong credit risk profile.

 

The ESG profile for financial sector entities typically factors in governance as a key differentiator. The sector has a reasonable social impact because of its substantial employee and customer base and can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, the lending decisions may have a bearing on the environment.

 

BOI has an ongoing focus on strengthening the various aspects of its ESG profile.

 

Key ESG highlights of BOI:

• ESG disclosures of the bank are evolving, and it is in the process of further strengthening the disclosures going forward
• The bank has started focusing on paperless banking and has taken several digitisaiton initiatives for the same
• As on March 31, 2023, around 28.77% of the bank's total workforce comprised women employees, and is improving over the years.
• Of the board members, 30% are independent directors with none of them having a tenure exceeding 10 years. The bank also has a dedicated investor grievance redressal mechanism

 

There is growing importance of ESG among investors and lenders. The commitment of BOI to ESG will play a key role in enhancing stakeholder confidence, given shareholding by foreign portfolio investors and access to domestic capital markets.

Outlook: Stable

The credit risk profile derives significant strength from the strong support expected from GoI both on an ongoing basis and in the event of distress. However, the bank's asset quality and profitability will remain key monitorables over the medium term.

Rating Sensitivity Factors

Upward Factors

• Sustained improvement in asset quality and profitability with the bank reporting RoA of over 0.7% on a steady-state basis
• Considerable improvement in capitalisation metrics with significant cushion over the regulatory requirement

 

Downward Factors

• Weakening of asset quality with gross NPAs rising from current levels
• Decline in capital adequacy ratios below minimum regulatory requirements (including capital conservation buffer, which is Tier I of 9.5% and overall CAR of 11.5%) for an extended period
• Material change in shareholding and/or expectation of support from GoI

About the Bank

BOI is the sixth-largest PSB in India, with gross advances of Rs 518,264 crore as on June 30, 2023. The bank had 5,153 branches and 8,225 automated teller machines and cash recycler machines across India as on June 30, 2023. A significant number of its branches cater to rural and semi-urban areas. It has strong presence in the corporate segment, with the bulk of its business and earnings coming from large corporate clients. It also has a strong presence overseas, with around 15.8% of its total business coming from outside India. GoI’s stake in the bank was 81.4% as on June 30, 2023

 

For fiscal 2023, BOI reported net profit of Rs 4,023 crore on total income (net of interest expense) of Rs 27,374 crore as compared to Rs 3,405 crore and Rs 21,941 crore, respectively, in the previous fiscal. For the quarter ended June 30, 2023, net profit was Rs 1,551 crore against total income (net of interest expense) of Rs 7,376 crore, as compared to Rs 561 crore and Rs 5,224 crore, respectively, for the corresponding period of the previous fiscal.

Any other information:

Note on tier II instruments (under Basel III)

The distinguishing feature of Tier II capital instruments under Basel III is the existence of the point of non-viability (PONV) trigger, the occurrence of which may result in loss of principal to the investors and hence, to default on the instrument by the issuer. According to the Basel III guidelines, the PONV trigger will be determined by the RBI. CRISIL Ratings believes the PONV trigger is a remote possibility in the Indian context, given the robust regulatory and supervisory framework and systemic importance of the banking sector. The inherent risk associated with the PONV feature is adequately factored into the rating on the instrument.

 

Note on non-equity Tier 1 capital instruments (Under Basel III)

The distinguishing features of non-equity Tier-I capital instruments (under Basel III) are the existence of coupon discretion at all times, high capital thresholds for likely coupon non-payment and principal write-down (on breach of a pre-specified trigger). These features increase the risk attributes of non-equity Tier-I instruments over those of Tier-II instruments under Basel III and capital instruments under Basel II. To factor in these risks, CRISIL Ratings notches down the rating on these instruments from the bank's corporate credit rating. Factors that could trigger a default event for non-equity Tier-I capital instruments (under Basel III), resulting in non-payment of coupon, include: i) the bank exercising coupon discretion, ii) inadequacy of eligible reserves to honour coupon payment if the bank reports low profit or a loss or iii) the bank breaching the minimum regulatory CET I, including CCB, ratios. Moreover, given their additional risk attributes, the rating transition for non-equity Tier-I capital instruments (under Basel III) can potentially be higher than that for Tier-II instruments

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating outstanding with outlook
INE084A08037	Tier II - Series X	25-Sep-13	9.80%	25-Sep-23	1,000	Complex	CRISIL AA+/Stable
INE084A08045	Tier II - Series XI	30-Sep-13	9.80%	30-Sep-23	500	Complex	CRISIL AA+/Stable
INE084A08060	Tier II - Series XII	31-Dec-15	8.52%	31-Dec-25	3,000	Complex	CRISIL AA+/Stable
INE084A08136	Tier I – Series VI	28-Jan-21	9.04%	Perpetual	750	Highly Complex	CRISIL AA/Stable
INE084A08144	Tier I – Series VII	30-Mar-21	9.30%	Perpetual	602	Highly Complex	CRISIL AA/Stable
INE084A08151	Tier II – Series XV	30-Sep-21	7.14%	30-Sep-31	1,800	Complex	CRISIL AA+/Stable
INE084A08169	Tier I – Series VIII	02-Dec-22	8.57%	Perpetual	1,500	Highly Complex	CRISIL AA/Stable
NA	Tier II Bonds (Under Basel III)*	NA	NA	NA	2000	Simple	CRISIL AA+/Stable
NA	Certificate of Deposit	NA	NA	7-365 days	30,000	Simple	CRISIL A1+

*Not yet issued