Bank of Baroda plans to raise capital up to Rs 3,000 cr via tier-II bonds

BOB is amongst the better capitalised PSBs, with a common equity tier I capital of 8.49% in 1QFY20

Public sector lender Bank of Baroda (BoB) plans to raise capital up to Rs 3,000 crore through tier-II bonds for meeting capital adequacy norms for the merged entity (integration of Vijaya and Dena Bank with BoB).

Rating agency India Ratings has assigned “AAA” stable rating to proposed bond offering by the PSB. Ratings for state-owned lender factors in large franchise, a pan-India presence, adequate funding base and liquidity. BOB is amongst the better capitalised PSBs, with a common equity tier I capital of 8.49 per cent in 1QFY20 (June 2019) and a capital adequacy ratio of 11.50 per cent.

The amalgamation has led to dilution of capital ratios as expected. However, the recent announcement of capital infusion of Rs 7,000 crore should add to the bank’s capital buffers (CET I could increase by about 120 basis points). The capital available with the merged entity will be sufficient to support its targeted level of growth for FY20, rating agency said in a statement.

Meanwhile, the agency has flagged concern over appointment of New Managing Director and Chief Executive (MD&CEO). P S Jayakumar has been heading BOB as MD& CEO since October 2015. 

While he was initially appointed for a three-year term, he received a one-year extension from the government in October 2018. His term will end on 12 October 2019. The Banks Board Bureau has invited applications for the positions of MD & CEO of four PSBs in August 2019, which includes BOB. 

The limited clarity regarding the appointment of the new MD and CEO could have a bearing on the bank’s near-to-medium term performance, especially since the amalgamation has become effective recently.

BOB maintained a relatively high provision coverage ratio (PCR) of 64.1 per cent on an amalgamated basis in 1QFY20 (excluding technical write-offs). The ratio, however, declined from 67.6 per cent in 4QFY19 (on pre-amalgamation basis) due to the amalgamation. While slippages declined on a year-on-year basis in FY19, it will remain a key monitorable in the near term.

BOB’s amalgamation with Dena Bank and Vijaya Bank became effective from 1 April 2019. The completion of the integration will take another 15-16 months, with the integration of the IT systems requiring the longest time.