Notwithstanding the downgrade of the BCA, Moody's has affirmed the deposits and senior unsecured ratings with a 'stable' outlook.
Global rating agency Moody’s Investor Service downgraded Bank of Baroda (BoB) baseline credit assessment (BCA) and adjusted to ba3 from ba2. In addition, Moody’s has also downgraded BoB’s and its London branch’s long-term and short-term Counterparty Risk Assessments to Baa3(cr)/P-3(cr) and the long term and short term domestic currency counterparty risk ratings (CRR) to Baa3/P-3 from Baa2(cr)/P-2(cr) and Baa2/P-2, respectively. The downgrade of BoB’s BCA to ba3 to reflect the weakening in asset quality and further downside risk from the deteriorating operating environment in India.
Further deterioration in asset quality poses risks to BoB’s profitability and capital, which would result in the bank’s credit metrics converging with other rated Indian public sector banks with a BCA of ba3. According to the rating rationale, asset quality in BoB’s micro, small and medium enterprises and agriculture portfolio – which has deteriorated – will continue to weaken further. “Lower economic growth in India is negative for these sectors and will drive continued weakness in these segments. Further, the current level of non-performing loan (NPL) formation rates in the SME segment may be understated, because there is regulatory forbearance on NPL recognition in this segment,” said Moody’s in the rationale.
Even Bank of India’s exposure to non-banking financial institutions (NBFIs), which is at 16% of its loan book, is the highest among Moody’s-rated banks in India and few of the large NBFIs continue to face headwinds and the high exposure to NBFIs is a source of additional risk for asset quality. “If the downside risks on asset quality materialise, resulting in higher credit costs and lower internal capital generation, the pace of improvement in profitability and capital will be negatively impacted,” said Moody’s in its report.
However, funding and liquidity remain key credit strengths similar to other public sector banks as BoB’s funding franchise benefits from government ownership. The government of India owned 71.6% of the bank as of December 2019, and plays a key role in the management of the bank, including appointing senior managers, and setting the bank’s strategic direction.
Share price of Bank of Baroda on Wednesday ended at `73.30, marginally gaining by 0.41% on BSE. Notwithstanding the downgrade of the BCA, Moody’s has affirmed the deposits and senior unsecured ratings with a ‘stable’ outlook. Moody’s affirmed BoB domestic and foreign bank long-term and short -term deposit ratings of Baa3, stable/P-3, and Bank of Baroda (London)’s foreign currency senior unsecured rating of Baa3 ‘stable’. Moody’s has also affirmed the London branch’s foreign currency senior unsecured MTN program rating of (P)Baa3.