Rating Rationale
August 30, 2019 | Mumbai
Bank of Maharashtra
Ratings Reaffirmed 
 
Rating Action
Lower Tier-II Bonds (Under Basel II) Aggregating to Rs.1000 Crore    CRISIL A+/Stable (Reaffirmed)
Lower Tier-II Bonds (Under Basel II) Aggregating to Rs.130 Crore    CRISIL A+/Stable (Withdrawn)
Rs.400 Crore Upper Tier-II Bonds (Under Basel II)   CRISIL A/Stable (Reaffirmed)
Rs.70 Crore Perpetual Tier-I Bonds (Under Basel II) CRISIL A/Stable (Reaffirmed)
Rs.500 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' rating on the Lower Tier II bonds (under Basel II) of Bank of Maharashtra (BoM). The ratings on Perpetual Tier-I bonds (under Basel II), Upper Tier-II bonds (under Basel II) and certificates of deposit programme have also been reaffirmed at 'CRISIL A/Stable/CRISIL A1+'. CRISIL has also withdrawn its 'CRISIL A+/Stable' rating on the Rs.130 crore Lower Tier-II bonds (under Basel II) as the instrument has been redeemed. The withdrawal is in line with CRISIL's policy.
 
The ratings continue to factor in the expectation of strong support from the majority owner, Government of India (GoI), and comfortable resource profile. These strengths are partially offset by weak asset quality, which has also impacted profitability, and high regional concentration in operations.
 
Earlier, the bank was put under prompt corrective action (PCA) framework on June 15, 2017. On December 31, 2018, GoI infused Rs 4,498 crore equity capital in the bank. This capital was largely used to make incremental provisions with provision coverage ratio (including technical write-offs) improving to around 81% as on December 31, 2018 from around 53% a year ago. Consequently, the net NPA ratio also improved to 5.91% as on December 31, 2018 from 12.17% a year ago. The bank was later, in January 2019, removed from the PCA framework. Further, GoI infused Rs 205 crore additional equity capital in February 2019. The Tier I and overall capital adequacy ratio (CAR) improved to 9.91% and 11.86%, respectively, as on March 31, 2019 (9.01% and 11.00%, respectively, as on March 31, 2018).

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 that the bank is expected to receive from its majority owner, the GoI, both on an ongoing basis and in the event of distress.

Key Rating Drivers & Detailed Description
Strengths:
* Strong expectation of support from the government
In its ratings on PSBs, CRISIL continues to factor in strong support from the 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 4,703 crore in fiscal 2019 and Rs 3,173 crore in fiscal 2018.
 
* Comfortable resource profile
The bank's comfortable resource profile is reflected in the large proportion of low-cost current account and savings account (CASA) deposits, at 48.08% of total deposits as on June 30, 2019 (46.33% as on June 30, 2018). Furthermore, total retail deposits constituted 78.10% of total deposits as on June 30, 2019. Consequently, cost of deposit remained low at 4.88% (annualised) for the quarter ended June 30, 2019.
 
Weaknesses:
* Weak asset quality
Asset quality remains weak as reflected in gross non-performing assets (NPA) of 17.9% as on June 30, 2019 (16.4% as on March 31, 2019). However, it has declined from 21.18% as on June 30, 2018. On an absolute basis, gross NPA stood at Rs 16,650 crore as on June 30, 2019. Slippages to NPAs as a percentage of opening net advances, though declined, remained high at 8.64% (annualised) for the quarter ended June 30, 2019 (10.80% for the corresponding period in previous fiscal). However, incremental lending to more granular assets such as retail, agriculture and micro, small and medium enterprise (MSME) book and better rated corporate accounts should reduce the slippages to NPAs from the current levels. Nevertheless, ability to arrest slippages, increase recoveries and thereby improve asset quality remain key monitorables.
 
* Weak earnings
Profitability remains weak on account of higher provisioning cost. Net loss was Rs 4,784 crore in fiscal 2019 as against loss of Rs 1,146 crore in previous fiscal, driven by elevated credit cost (4.57% in fiscal 2019 vis-a-vis 3.46% in fiscal 2018). Consequently, return on assets deteriorated to negative 3.01% for fiscal 2019 from negative 0.73% for fiscal 2018. Further, credit cost remained high at 2.30% for the quarter ended June 30, 2019. Nevertheless, the bank reported a profit of Rs 81 crore for the quarter ended June 30, 2019, supported by tax write back of Rs 343 crore as against a loss of Rs 1,119 crore for the corresponding period of the previous fiscal. Provision coverage ratio (excluding technical write-off) stood at 70.96% as on June 30, 2019. Ability to improve operating profits and also contain credit costs will, therefore, remain a key monitorable.
 
* High regional concentration in operations
Operations are concentrated in Maharashtra, which accounted for 69.43% (Rs 16,1076 crore) of the business and 66% of the branches as on June 30, 2019. While branches have been opened outside the state, concentration risk is likely to reduce only in the long term.
 
Liquidity: Superior
Liquidity remains superior supported by strong retail deposit base that forms a significant part of the total deposits. Liquidity coverage ratio was 229.66% as on June 30, 2019, against the regulatory requirement of 100%. The excess statutory liquidity ratio, which further cushioned liquidity, was Rs 5,952.85 crore (19.00% of net demand and time liabilities) as on June 30, 2019. Liquidity also benefits from access to systemic sources of funds such as the liquidity adjustment facility from the Reserve Bank of India, 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 its comfortable resource profile. However, asset quality and earnings are expected to remain under pressure in the near to medium term.
 
Rating sensitivities factors
Upside scenario:
* Substantial and sustained improvement in asset quality
* Improvement in profitability leading to positive return on assets on a steady state basis
 
Downside scenario:
* Material change in expectation of support from GoI
* Decline in capital adequacy ratios below minimum regulatory requirements (including CCB, which is Tier I of 9.5% and overall CAR of 11.5% as on March 31, 2020) over an extended period of time

About the Bank

BoM is a medium-sized PSB, with assets of Rs 1,55,800 crore, and a network of 1,832 branches and 1,860 automated teller machines (ATMs) as on June 30, 2019; 57% of its branches are in rural and semi-urban areas. With deposits of Rs 1,38,941 crore and advances of Rs 93,032 crore, the bank had market shares of ~1.2% and ~1.1% of deposits and advances, respectively, in the banking system, as on June 30, 2019. Tier I, and overall CAR stood at 9.71% and 11.69%, respectively, as on June 30, 2019 (9.91% and 11.86%, respectively, as on March 31, 2019).
 
PAT was Rs 81 crore on a total income (net of interest expense) of Rs 1,416 crore for the quarter ended June 30, 2019, as against loss of Rs 1,119 crore on a total income (net of interest expense) of Rs 1,205 crore, for the corresponding period of the previous fiscal. Net loss was Rs 4,784 crore on a total income (net of interest expense) of Rs 5,281 crore in fiscal 2019 as against Rs 1,146 crore and Rs 4,896 crore, respectively, in the previous fiscal.

Key Financial Indicators
As on / for the period ended June 30 Unit 2019 2018
Total assets Rs crore 155800 151045
Total income Rs crore 3192 2987
Profit after tax Rs crore 81 -1119
Gross NPA % 17.90 21.18
Overall capital adequacy ratio  % 11.69 10.14
Return on assets (annualised) % 0.20 -2.8

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Note on Hybrid Instruments (Under Basel II):
Given that hybrid capital instruments (Tier-I perpetual bonds and Upper Tier-II bonds; under Basel II) have characteristics that set them apart from Lower Tier-II bonds (under Basel II), the ratings on the two instruments may not necessarily be identical. The factors that could trigger a default event for hybrid instruments include: the bank breaching the regulatory minimum capital requirement, or the regulator's denial of permission to the bank to make payments of interest and principal if the bank reports losses. Hence, the transition from one rating category to another may be significantly sharper for these instruments than in the case of Lower Tier-II bonds; this is because debt servicing on hybrid instruments is far more sensitive to the bank's overall capital adequacy levels and profitability.
 
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs Crore) Outstanding rating with Outlook
INE457A09165* Perpetual Tier-I Bonds
(Under Basel II)		 30-Sep-09 9.25 Perpetual 70.00 CRISIL A/Stable
INE457A09157* Upper Tier-II Bonds
(under Basel II)		 30-Sep-09 8.95 30-Sep-24 100.00 CRISIL A/Stable
INE457A09173 Upper Tier-II Bonds
(Under Basel II)		 1-Feb-10 8.65 1-Feb-25 300.00 CRISIL A/Stable
INE457A09199 Lower Tier-II Bonds
(Under Basel II)		 31-Dec-12 9.00 31-Dec-22 1000.00 CRISIL A+/Stable
NA Certificates of Deposit NA NA 7-365 Days 1500.00 CRISIL A1+
*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 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Certificate of Deposits  ST  1500.00  CRISIL A1+      31-08-18  CRISIL A1+  30-08-17  CRISIL A1+  27-12-16  CRISIL A1+  CRISIL A1+ 
            25-01-18  CRISIL A1+      04-10-16  CRISIL A1+   
                    10-03-16  CRISIL A1+   
Lower Tier-II Bonds (under Basel II)  LT  1000.00
30-08-19 		 CRISIL A+/Stable      31-08-18  CRISIL A+/Stable  30-08-17  CRISIL A+/Negative  27-12-16  CRISIL AA-/Negative  CRISIL AA/Negative 
            25-01-18  CRISIL A+/Stable      04-10-16  CRISIL AA-/Negative   
                    10-03-16  CRISIL AA/Negative   
Perpetual Tier-I Bonds (under Basel II)  LT  70.00
30-08-19 		 CRISIL A/Stable      31-08-18  CRISIL A/Stable  30-08-17  CRISIL A/Negative  27-12-16  CRISIL A+/Negative  CRISIL AA-/Negative 
            25-01-18  CRISIL A/Stable      04-10-16  CRISIL A+/Negative   
                    10-03-16  CRISIL AA-/Negative   
Tier I Bonds (Under Basel III)  LT    --    --  31-08-18  Withdrawal  30-08-17  CRISIL BBB+/Negative  27-12-16  CRISIL A-/Negative  CRISIL A+/Negative 
            25-01-18  CRISIL BBB+/Negative      04-10-16  CRISIL A-/Negative   
                    10-03-16  CRISIL A+/Negative   
Upper Tier-II Bonds (under Basel II)  LT  400.00
30-08-19 		 CRISIL A/Stable      31-08-18  CRISIL A/Stable  30-08-17  CRISIL A/Negative  27-12-16  CRISIL A+/Negative  CRISIL AA-/Negative 
            25-01-18  CRISIL A/Stable      04-10-16  CRISIL A+/Negative   
                    10-03-16  CRISIL AA-/Negative   
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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