| Bank of Baroda | ||||||||||||
| Rating Reaffirmed | ||||||||||||
| Rating Action | ||||||||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||||||||
| 1 crore = 10 million | ||||||||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AAA/CRISIL AA+1/Stable’ rating on existing debt instruments of Bank of Baroda (BoB).
The ratings on the debt instruments of BoB continue to factor in the expectation of strong support from majority owner, Government of India (GoI), established franchise and strong market position in the Indian banking sector, adequate capitalization and resource profile. The ratings also factor in BoB’s improving asset quality metrics which however still continue to be elevated especially in the MSME & Agriculture portfolio; as well as the bank’s modest profitability for its rating category.
CRISIL Ratings’ rating on the Tier I bonds (under Basel III) of BoB is as per the criteria 'CRISIL Ratings rating criteria for BASEL III-compliant instruments of banks'. CRISIL Ratings evaluates the bank's (i) reserves position (adjusted for any medium-term stress in profitability) and (ii) cushion over regulatory minimum CET1 (including CCB) capital ratios. Also evaluated is the demonstrated track record and management philosophy regarding maintaining sufficient CET1 capital cushion above the minimum regulatory requirements. The bank's eligible reserves to total assets remains comfortable at over 6%. Additionally, the bank has maintained adequate capitalization metrics with total capital ratio improving from 13.30% as on March 31, 2020 to 15.68% as on March 31, 2022 leading to an average CET1 capital buffer of more than 3% during the same period. The cushion over regulatory capital ratio along with high eligible reserves places the Bank in a comfortable position for servicing its Tier I bonds. A material reduction in this cushion or any substantial depletion of share premium account or any regulatory changes to the appropriation of the share premium account pertaining to adjustment of accumulated losses would be key rating sensitivity factors for Tier I bonds.
Consequent to redemption, CRISIL Ratings has withdrawn its rating on Additional Tier-I bonds (under Basel III) of Rs 1,350 crore and Lower Tier II bonds of Rs 850 Crore (See Annexure 'Details of rating withdrawn' for details) as CRISIL Ratings has received independent confirmation that these instruments are fully redeemed. The withdrawal is in line with CRISIL Ratings withdrawal policy.
1For Tier I bonds under Basel III. |
Analytical Approach For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profile of BoB and its subsidiaries. This is because of majority shareholding, business and financial linkages and shared brand. The ratings on BoB’s debt instruments continue to factor in strong support expected from its majority owner, the GoI (63.97% shareholding as on September 30, 2022). This is because GoI is both the majority shareholder in public sector banks (PSBs) and the guardian of India's financial system. The stability of the banking sector is of prime importance to GoI, given the criticality of the sector to the economy, the 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
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths: Strong expectation of support from Government of India (GoI) The ratings continue to factor in an 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 PSBs and the guardian of India’s financial system. The stability of the banking sector is of prime importance to GoI, given the criticality of the sector to the economy, the 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. CRISIL Ratings believes that the majority ownership creates a moral obligation on GoI to support PSBs including BoB. As a part of ‘Indradhanush’ framework, government had pledged to infuse at least Rs 70,000 crore in PSBs during fiscal 2015 to 2019. Further in October 2017, the government had outlined a recapitalisation package of Rs 2.11 lakh crores over fiscals 2018 and fiscal 2019. The government allocated Rs 70,000 crore for capital infusion in fiscal 2020. BoB was allocated Rs 5375 crore in fiscal 2018 and Rs 7,000 crore in fiscal 2020. In fiscal 2021, BoB has raised capital of Rs 4500 crore via QIP. CRISIL Ratings believes that GoI will continue to provide distress support to all PSBs including BoB and will not allow any of them to fail. It will also support them in meeting Basel III capital regulations.
Established franchise and strong market position in the Indian banking sector Currently BoB is among India’s top five banks by asset size with total assets of Rs 12,85,486 crore as on June 30, 2022 (Rs 12,78,000 crore as on March 31, 2022) with a share of >6% as on June 30, 2022. On the deposits front too, the bank has Rs 10,32,714 crores of deposits as of June 30, 2022, reflecting a share of >6% as on the same date. It is one of the most geographically diversified public sector banks (PSBs) with international presence spanning across 94 offices in 17 countries and bank’s international operations contributing to 13.6% of the global business as on March 31, 2022 (12.8% as on end March 31, 2021).
The bank reported growth of 9% in the gross advances in fiscal 2022. The gross advances of the bank thereafter grew by 2.6% sequentially and 18% Y-o-Y to Rs 839,785 crore as on June 30, 2022. This growth was largely driven by retail book which grew by 23% Y-o-Y as well as international advances which grew by 31% Y-o-Y. Within retail book, major contributors to growth were car loans, personal loans and gold loans. The share of international book grew to 17% as on June 30, 2022 (16% as on March 31, 2022) from 15% as on March 31, 2021.
Adequate capitalisation BoB remains adequately capitalized with Tier I and overall CAR (under Basel III) at 12.97% and 15.46% respectively as on June 30, 2022 (13.18% and 15.68% respectively as on March 31, 2022). The bank’s networth coverage for net NPA improved to 7.0 times as on June 30, 2022 (6.4x as on March 31, 2022) from 3.5 times as on March 31, 2021. BoB had raised capital via QIP of Rs 4500 crore during fiscal 2021. Capitalisation has been supported by regular infusion from GoI. CRISIL Ratings believes that BoB will be able to maintain adequate capitalisation over the medium term, backed by capital support from GoI.
Stable resource profile BoB has a large, stable and diversified resource profile. The bank has a large deposit base that grew by 11% Y-o-Y to Rs 10,32,714 crore as on June 30, 2022 (Rs 10,45,939 crore as on March 31, 2022). Owing to strong international presence, BoB generates about 12% of its deposits from overseas that adequately support and provide geographical diversity to the bank’s resource profile. Overall, the bank’s current and savings account (CASA) deposits grew by 11% Y-o-Y translating into CASA ratio of 41.1% as on June 30, 2022 (41.5% as on March 31, 2022). With high share of CASA deposits, the bank has been able to keep its costs of deposits under control. The average cost of deposits for the quarter ending June 30, 2022 was 3.5% (3.5% for fiscal 2022, down from 4.0% for fiscal 2021. Share of retail deposits (Savings account + retail term deposits) stood healthy at 72.2% as on June 30, 2022 (71.4% as on March 31, 2022).
CRISIL Ratings believes that BoB will maintain an adequate resource profile over the medium term given its well spread branch network, diversified investor base and access to international deposits.
Weakness: Modest asset quality BOB has reported considerable improvement in the asset quality in fiscal 2022, with Gross non-performing assets (GNPA) improving to 6.3% as on June 30, 2022 (6.6% as on March 31, 2022) from 8.9% as on March 31, 2021. The improvement stemmed primarily from the corporate book as evidenced by a reduction of ~Rs 12,700 crore in the absolute corporate GNPAs. GNPA ratios of MSMEs and Agriculture however continue to be elevated. Overall slippage ratio improved to 1.7% in Q1 FY23 (annualized) (1.6% in fiscal 2022) from 2.7% in fiscal 2021. As the PCR increased to 75% as on March 31, 2022 from 67% a year ago, the Net NPA ratio improved to 1.7% as on March 31, 2022 from 3% a year ago. It further improved to 1.6% as on June 30, 2022.
Collections for the bank were impacted during the pandemic period. However, with opening of economy, collection efficiency (excluding agriculture) has consistently improved to 98% in Q1 FY23 from 93% in Q1 FY22. As a result, the SMA 1 and SMA 2 accounts as a proportion to standard advances (with exposure above Rs 5 crore as per CRILC data) improved to 0.48% as on June 30, 2022 (from 2.68% as on June 30, 2021).
Total restructured standard book (all inclusive) as on June 30, 2022 stood at ~Rs 19,667 crore (2.34% of gross advances), out of which MSME accounted for 25% and large corporates accounted for 48%. Almost 95% of the restructured book under COVID-19 scheme is expected to be out of moratorium by March 2023. The bank’s exposure to NCLT accounts stood at Rs 50,003 crore as on June 30, 2022 with an average provision coverage of 97.5%.
The performance of the restructured book as well as the bank’s ability to bring down GNPAs especially for MSME and Agriculture segment will remain key monitorable.
Modest profitability for the rating category Profitability was impacted in the past (with net losses reported in fiscal 2016 and fiscal 2018) owing to elevated GNPA metrics leading to higher credit costs. However, with improvement in the asset quality, BoB’s earnings profile has improved with the bank reporting PAT of Rs 7,272 crore in fiscal 2022 (as compared to adjusted PAT of Rs 4143 crore in fiscal 2021) and ROTA of 0.60% in fiscal 2022 (as compared to 0.36% adjusted ROTA in fiscal 2021). The adjustment is on account of one-time impact of Deferred Tax Assets (DTA) reversal in fiscal 2021.
While the yield on advances contracted by 20 bps, cost of deposits reduced by 50 bps leading to higher Net Interest Margin (NIM) which increased by ~20bps in fiscal 2022. However, it was offset by lower non-interest income owing to MTM losses in investment, resulting in steady operating profits ratio.
During Q1 FY23, while the NIMs slightly improved, MTM losses of Rs 1,168 crore resulted in lower operating profit ratio. This was however offset by lower credit costs, resulting in PAT of Rs 2,168 crore and improved ROTA of 0.7%.
Going forward, CRISIL Rating expects steady improvement in the earning profile, with limited incremental credit costs considering high provision coverage ratio of 76% as on June 30, 2022. |
Liquidity: Superior The Liquidity Coverage Ratio of the Bank stood at 144.07% as on June 30, 2022, as against statutory minimum of 100%. The bank's liquidity also benefits from access to systemic sources of funds, such as the liquidity adjustment facility from RBI and access to the call money market.
ESG profile CRISIL Ratings believes that BoB’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.
The ESG profile for financial sector entities typically factors in governance as a key differentiator between them. The sector has 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.
BoB has an ongoing focus on strengthening various aspects of its ESG profile.
BoB’s key ESG highlights:
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Outlook: Stable CRISIL Ratings believes that BoB will continue to benefit from strong support from GoI. The bank’s asset quality and earnings profile are however, expected to remain modest over the medium term. |
Rating Sensitivity factors Downward Factors
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About the Bank Incorporated in 1908 as a privately owned institution headquartered in Vadodara, BoB expanded its operations through mergers and acquisitions before being nationalized in 1969. GoI shareholding in BoB stood at 63.97% as on September 30, 2022. Presently, BoB is amongst the five largest banks in India with a domestic branch network of 8,168 branches, of which 60% are located in rural and semi urban areas. BoB also has a large international presence amongst Indian banks with 94 overseas offices across 17 countries. |
Key Financial Indicators: Bank of Baroda-Standalone
Bank of Baroda-Consolidated
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Any other information: 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 capital conservation buffer, 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.
Note on Tier-II Instruments (under Basel III) The distinguishing feature of Tier-II capital instruments under Basel II, is the existence of the point of non-viability (PONV) trigger, 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 that the PONV trigger is a remote possibility in the Indian context, given the robust regulatory and supervisory framework and the 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 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. |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
^Not yet issued
Annexure - Details of Rating Withdrawn
*Call option exercised on Rs 850 Crore Lower Tier-II Bonds on June 25, 2022 |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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