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.