CRISIL: BoI margins to see pressure

CRISIL has assigned "AA+" rating to Bank of India's (BoI's) Rs 15.0 billion Tier II bond issue (under Basel III)

Rating agency CRISIL has said Bank of India (BoI), which plans to raise Rs 1,500 crore via Tier-II bonds, will continue to see pressure on margins in FY17, due to interest reversal on bad loans, subdued credit offtake, and the marginal cost of funds-based lending rate regime.

It has assigned an AA+ rating to BoI's Rs 1,500-crore bond issue (under Basel-III rules). This reflects significant pressure on profitability and capital coverage for weak assets over the medium term. Subdued profitability over the next few quarters could ensue, as in the year ended March 31, lowering the government-owned bank's revenue reserves and credit balance in the profit and loss account.

The Mumbai-based lender reported a full-year loss of Rs 6,090 crore in FY16, against a net profit of Rs 1,710 crore the previous year.

The ratings factor in BoI's established market position and adequate resource profile.

CRISIL said steep deterioration in the corporate loan portfolio resulted in higher slippages to non-performing assets (NPAs) in the second half of FY16, pushing the provisioning for these.

The slippages were primarily from the iron and steel, infrastructure, and construction sectors, mainly from the bank's large corporate and mid-corporate loan book. Overall, gross NPAs increased to 13.1 per cent of the total as on end-March, from 5.4 per cent a year before.

The ratings, nevertheless, continue to reflect expectation of strong support from the government, both on an ongoing basis and in case of distress.

Under the government's Indradhanush plan, announced in FY16, six public sector banks, including BoI, have been identified to play a vital role in economic development. Hence, a significant share of government capital infusion over the next three years will be in these. The government infused Rs 3,605 crore as equity capital in BoI in FY16.

The bank still has a healthy deposits market share of 4.9 per cent. It had 5,016 branches, of which 1,957 were in rural areas, as on end-March. Low-cost current and savings account deposits accounted for 34.2 per cent of its domestic deposits (from 29.5 per cent on end-March 2015.