Fitch affirms Bank of Baroda's IDR at 'BBB-'; VR off rating watch negative

The lender's performance is likely to stay subdued on weak economy, NBFC stress

Global rating agency Fitch today took Bank of Baroda (BOB) off the Rating Watch Negative and said that public sector bank's asset quality has remained broadly stable in the six months since its merger with two other state-owned banks, Dena Bank and Vijaya Bank. The three had merged in April 2019.

Fitch affirmed BOB’s Long-Term Issuer Default Rating (IDR) at 'BBB-' and its Viability Rating (VR) at 'bb'. The outlook is stable.

BoB’s core capitalisation has moderately improved following capital support from the state in the fourth quarter of the financial year ended March 2019 (FY19) and more recently in Q2FY20.

However, overall performance is expected to remain subdued given the weak macro environment and potential stress in the non-bank and real estate sectors in India. Fitch has put a negative outlook on the Indian banking sector.

The lender's intrinsic risk profile mainly stems from its risk appetite, which has reduced in recent years. But the weak operating environment has rendered its financial metrics, particularly asset quality and earnings, somewhat volatile.

Its key core financial metrics such as the impaired loans ratio and core capitalisation haven't deteriorated materially due to the merger. Its impaired loans ratio, at 10.3 per cent in 1HFY20, is slightly above the sector average.

Nevertheless, any weakness in terms of financial profile has not diminished the bank's franchise and ability to source low-cost deposit funding.

BoB has received two rounds of equity from the state (Q2FYE20: $1 billion and 4QFYE19: $720 million in Q4FY19), which somewhat restored the bank's Core Equity Tier-1 (CET-1) capital ratio (1HFYE20: 9.8 per cent).

"Overall, net NPL-to-equity remains quite high at 35 per cent, but is lower than in previous years. We believe that the state will be willing to inject more equity into BOB to meet growth and provisioning demands," Fitch said.