Rationale: The "AAA" (pronounced triple A) rating assigned to the Rs 6000 million bonds issue of Bank of Baroda (BoB) has been reaffirmed.
The rating reaffirmation reflects BoBs healthy capitalization, favourable market position, strong resource profile and comfortable liquidity position. The rating derives support from the majority ownership of the Government of India. BoBs loan portfolio, however, is of moderate credit quality and the bank would need to improve its asset quality and limit fresh slippage of assets to non-performing assets (NPA).
BoB ranks among the top five banks in the Indian banking system with a market share of around 5 per cent of deposits and advances of all scheduled commercial banks (SCBs) as of March 31, 2001. The bank has a widespread domestic network of over 2,600 branches that provides it with a strong resource profile and low-cost deposit base. In addition, BoB has the second largest overseas network among Indian banks with 38 branches located across 10 countries. As of March 31, 2001, the bank had total deposits of Rs 539.86 billion and total assets of Rs 633.22 billion. The bank reported a profit after tax (PAT) of Rs 2.75 billion for the financial year 2000-2001 and of Rs 4.39 billion for the nine-month period from April to December 2001 as against Rs 4.29 billion during April to December 2000. As in the case of other public sector banks, BoBs rating also benefits from its status as a majority Government-owned institution.
In Crisils opinion, the likelihood of Government support for public sector banks is underpinned by strong economic and moral imperatives, given the central role played by these banks in the Indian economy. BoB has a healthy capitalization with a Tier I ratio of 8.49 per cent as of March 31, 2001. Its capital base at Rs 33.56 billion as of March 31, 2001 is larger than that of most other banks in the Indian banking system and places it in a better position to withstand large asset-related shocks. The relatively high level of asset side risks have, however, made increased demands on the banks capital, and its networth coverage for net NPAs was moderate at 1.81 as of March 31, 2001.
Further, given the depressed state of the capital market and the low valuations of most public sector banks today, accessing the capital market does not seem to be an attractive option for the moment. BoBs strong resource profile is characterized by its large deposit base, moderate growth in deposits and low deposit costs. The bank has maintained a strong funding profile, which is evident from its well-diversified retail deposit base. The bank has a significant proportion of branches (65 per cent) in the semi-urban and rural areas that provides it with a stable source of retail deposits (33.7 per cent of domestic deposits), given the limited presence of the new private sector banks in these areas.
BoBs deposits grew at a compounded annual growth rate ((3 year CAGR) of 11.33 per cent during financial year 1998-99 to financial year 2000-2001 compared to a 16.68 per cent rate for all SCBs. BoBs cost of deposits compares favourably with that of majority of the public sector banks, coming down steadily from 7.73 per cent during the financial year 1997-98 to 6.96 per cent (on a fortnightly average basis) during the financial year 2000-2001, in line with the decline in interest rates in the economy.
BoBs liquidity position continues to be strong and is supported by steady growth in deposits, access to the inter-bank market, investments above regulatory requirements in Government securities and its healthy deposit profile comprising a significant proportion of low-cost retail deposits. Like all other banks, BoBs investment portfolio is exposed to interest rate risk, given the inherent asset liability mismatch and the large proportion of Government securities. The presence of significant unbooked appreciation in its investment portfolio, however, provides some cushion against any adverse interest rate movement.
BoBs advances portfolio is well-diversified across industries thus cushioning the impacting of sectoral downturns. BoBs advances portfolio, however, is of moderate credit quality and the bank continues to have high gross NPAs of 13.74 per cent as of December 31, 2001. Net NPAs were moderate at 6.07 per cent as of December 31, 2001. NPAs have a significant impact on the banks profitability because of provisioning requirements as well as lost income. The banks NPA position can be attributed to its exposure to cyclical industries like iron and steel, textiles, chemicals and engineering that makes it susceptible to the downturn in these industries. Moreover, the bank has high NPAs in priority sector lending with gross NPAs of 21.88 per cent as of March 31, 2001. This is a cause for concern, given the significant proportion of lending to this sector (49 per cent as against the Reserve Bank of Indias (RBI) norm of 40 per cent). The bank would need to improve its asset quality and limit fresh slippages of assets to NPAs.
The bank has initiated steps to reduce its NPAs, including close monitoring of problem accounts, one time settlements (OTS) and legal recourse through debt recovery tribunals (DRTs). The RBI has proposed a merger of Benaras State Bank (BSB) with BoB. BSB is a small-sized old-generation private sector bank. As of March 31, 2001, BSB had assets of Rs 11.34 billion, deposits of Rs 10.34 billion and net advances of Rs 2.30 billion. BSB is a loss-making bank with an eroded networth. Given the weak financials of BSB, its proposed merger with BoB would have an implication on the latters asset quality, as well as its financial risk profile. Hence, the financial implications of the merger on BoB would be a rating sensitivity. Crisil will continue to monitor the developments in this regard.
BoBs earnings profile is characterised by moderate profitability and moderate level of revenue diversification. It continues to be underpinned by comfortable, albeit declining, interest margins. BoBs core fee-based income as a percentage of average assets has been moderate at around 1 per cent during the financial year 1998-99 to the financial year 2000-2001 period. The banks operational efficiency, as measured by average cost to income ratio at 57 per cent during the financial year 1998-99 to the financial year 2000-2001 is moderate but better than that of many other public sector banks. Moreover, employee expenses constituted nearly 75 per cent of total operating expenses.
The voluntary retirement scheme (VRS) implemented by the bank during financial year 2000-2001 has brought down the employee strength by nearly 14 per cent and this is expected to improve the operating cost structure. BoB has undertaken technology initiatives in order to improve its customer service levels and provide new distribution channels to counter stiff competition, especially in the metro and urban centres, that account for a bulk of the business for banks. The bank has retained the Gartner Group as its technology consultant for the same. The major technology initiatives include implementating a Core Banking Solution, networking its branches to offer "Anywhere Banking," installing nearly 550 automated teller machines (ATM) by March 2003, web-enabling of its cash management systems and the like. The bank proposes to network about 1,000 branches, which account for nearly 80 per cent of its total business. The new services it proposes to introduce include, among others, Internet banking and debit cards.
Business: BoB was incorporated in 1908 as a privately owned institution with headquarters in Baroda, Gujarat. The bank subsequently expanded its operations through mergers and acquisitions, before being nationalized in July 1969 during the first round of nationalisation along with 13 other banks. The governments holding was subsequently brought down to 66.2 per cent after the bank went in for an initial public offering in 1996.
BoB ranks among the top five banks in the country with a market share of nearly 5 per cent in terms of deposits, advances and assets of all SCBs. In terms of assets, however, BoB is only one-fifth the size of State Bank of India, the countrys largest bank, and three-fifths the size of the ICICI Group (the second largest banking group), and is comparable to Bank of India, Punjab National Bank and Canara Bank.
Priority sector lending is a significant activity for the bank constituting 49 per cent of the net banking credit, which is well above the RBIs stipulation of 40 per cent. BoB had a domestic network of 2,631 branches and 119 extension counters as of March 31, 2001, spread across 23 states and four union territories, including a large rural network of 1,173 branches. BoB also has the second largest overseas network among Indian banks, with 38 branches located in 10 countries. Further, the bank has a majority shareholding in the Bank of Baroda (Kenya) and has two fully-owned subsidiaries in Uganda and Hong Kong. The bank also sponsors and is actively involved in the management of 19 regional rural banks.
Through its non-banking subsidiaries, BoB offers a host of financial services, such as, merchant banking, fund management, housing finance and credit cards. The banks housing finance business is conducted through the 75 per cent owned Bank of Baroda Housing Finance Ltd and credit card activities is undertaken through the fully-owned BOBCARD Ltd. BoBs other subsidiaries include BoB Asset Management Company Ltd and BoB Capital Markets Ltd. BoB also has a 94.2 per cent stake in Nainital Bank Ltd, which has a branch network of 54 branches and reported a PAT of Rs 50.47 million in the financial year 2000-2001. Further, during the financial year 1999-2000, BoB completed the merger of Bareilly Corporation Bank Ltd, which had a network of 63 branches, with itself. BoB proposes to enter the life insurance business with a foreign strategic partner. BoB commenced primary dealership business in its wholly-owned subsidiary, BoB Capital Markets Ltd, with a total capital base of Rs 600 million during April 2002.
Prospects: The Indian banking sector has entered a new phase with the growing thrust on universal banking as exemplified by the merger of ICICI Ltd and ICICI Bank. The entry of large players like ICICI and IDBI will increase competitive pressures for large banks like Bank of Baroda. Besides, competition in both corporate and retail banking will also increase from the foreign banks given that the recent Budget has allowed them to set up wholly-owned subsidiaries in the country. They are, however, expected to increase their penetration only over a three-to-five year timeframe.
BoB needs to effectively use technology to counter the challenge posed by the new private sector banks, especially in the retail business. Better customer service backed by superior technology and the lack of legacy systems has enabled the new private sector banks to gain market share from the public sector banks. This trend is likely to continue in future too and intensify further as and when foreign banks increase penetration through the subsidiary route. BoB has initiated efforts on the technology front in order to improve service levels and provide new delivery platforms to customers, especially in the metros and other urban centres. The success of these initiatives will have a bearing on BoBs market position.
Key Issues: The banks ability to manage its transition to a technology-oriented and customer-driven organization will determine its future financial performance and market position. Its ability to improve the quality of its advances portfolio, reduce NPA levels and most importantly arrest fresh slippage of assets to NPAs would be a key rating sensitivity. The financial implications of the proposed merger of Benaras State Bank with it would be a key rating sensitivity for BoB.