Fitch affirms Bank of Baroda, subsidiary at 'BBB-' with stable outlook

Action factors in a high likelihood of sovereign support to the public sector lender; rating agency says profitability to rise further; high loan growth to resume

Fitch Ratings has affirmed Bank of Baroda's (BoB) and its subsidiary Bank of Baroda (New Zealand) Ltd’s long-Term Issuer Default Ratings (IDRs) at 'BBB-'. The outlook is stable.

The rating action on the public sector lender factors in a high likelihood of sovereign (Government of India) support to the bank in times of need. The expectation of support stems from BoB's large market position with over six per cent market share in sector assets and deposits, and 64 per cent state ownership. BoB also plays a quasi-policy role through social lending.

Fitch has also reassessed the earnings and profitability score at 'b', from 'b-', and revised the outlook to positive. The agency expected the four-year average operating profit/risk-weighted assets (RWA) ratio (current: 0.6 per cent) to gradually approach the 'bb' threshold of 1.25 per cent in the foreseeable future. This is mainly due to declining loan-impairment charges and, to a lesser extent, higher income generation despite the near-term negative impact on treasury income amid rising interest rates, it added.

Fitch said BOB is expected to cautiously resume its growth appetite in the corporate and SME space after several years of tepid growth, which will test recent enhancements to its risk underwriting and controls. Its appetite for retail loans to remain higher, although loans are still mainly from secured asset classes, such as housing loans.

Fitch expects India's strong potential GDP growth of seven per cent in the medium term. Also a relatively stable operating environment (OE) - despite some near-term inflationary pressures - to create moderate opportunities for banks. The view on the OE is further supported by India's large and diversified economy, high domestic consumption growth, and reasonable insulation from external risks.

BOB's strong local franchise should continue to support business generation, although capital constraints amid more aggressive lending by peers has led to loss of market share in recent years. The government influence can weigh on its traditional business model (loans: 63 per cent of assets), but even more so its risk appetite, similar to other state banks. "We believe its risk appetite was previously higher, which, in less-benign OE conditions, has exacerbated the negative impact on key financial metrics", it added.