Moody's downgrades BoB's baseline credit assessment on asset quality issues

Agency also cites deteriorating operating environment for decision; affirms lender's domestic and foreign bank deposit ratings

Global rating agency Moody’s has downgraded Bank of Baroda (BoB)'s baseline credit assessment (BCA) from “ba2” to “ba3” on weakening asset quality and further risks from the deteriorating operating environment in India.

The agency said deterioration in asset quality poses risks to BoB's profitability and capital.

Moody's affirmed the public sector lender's domestic and foreign bank long-term and short-term deposit ratings of Baa3, stable/P-3. It also affirmed Bank of Baroda (London)'s foreign currency senior unsecured rating of Baa3, stable. Two public sector banks – Dena Bank and Vijaya Bank merged with Bank of Baroda from April 01, 2019.

Funding and liquidity remain key credit strengths of the public sector bank. Similar to other PSU lenders, BoB's funding franchise benefits from government ownership, Moody’s said.

The Government of India (Baa2 negative) owned 71.6 per cent of the bank as of December 31, 2019, and plays a key role in its management. The government has made significant capital infusions into all public sector banks, including Bank of Baroda, over the last few years.

Moody’s said 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, Moody’s said.

Another risk factor is BoB's exposure to non-banking financial institutions (NBFIs), which amounts to 16 per cent of its loan book, the highest among Moody's-rated banks in India. A 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.