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CRISIL AA+/Stable assigned to Tier II Bonds (Under Basel III), Tier I Bonds (Under Basel III) rating upgraded to CRISIL AA/Stable

Posted On: 2021-09-22 22:38:28 (Time Zone: IST)

CRISIL Ratings has upgraded its rating on the tier I bonds (under Basel III) of Bank of India (BOI) to 'CRISIL AA/Stable' from 'CRISIL AA-/Stable'. CRISIL Ratings has also assigned its 'CRISIL AA+/Stable' rating to the Rs 1,800 crore tier II bonds (under Basel III) and reaffirmed its 'CRISIL AA+/Stable/CRISIL A1+' ratings on the Tier II Bonds (under Basel III) and the certificate of deposit.

CRISIL Ratings has also withdrawn its rating on the tier II bonds (under Basel III) of Rs. 1500 crore (See Annexure 'Details of Rating Withdrawn' for details) in-line with its withdrawal policy. CRISIL has received independent verification that these instruments are fully redeemed.

The upgrade in the rating of Tier I bonds (under Basel III) factors in improved position of BOI to make future coupon payments, supported by an adjustment of accumulated losses with share premium account, and the improved capital ratios. Pursuant to the adjustment, the eligible reserve to total assets ratio for the bank has improved. Additionally, vide the Department of Financial Services Gazette notification no. CG-DL-E-23032020-218862 (S.O. 1200 E) dated 23.03.2020 referred to as Nationalised Banks (Management and Miscellaneous Provisions) Amendment Scheme, 2020, the bank still has share premium reserves which can be utilised to set off any losses in future, and this supports the credit profile of tier I (under Basel III) instruments. However, any substantial depletion of the share premium account or any regulatory changes to appropriation of the share premium account pertaining to adjustment of accumulated losses are key monitorables.

Supported by the regular capital infusion made by the Government of India (GoI) and higher accrual, BOI's capital ratios have improved, as reflected in tier 1 and overall capital to risk-weighted adequacy ratio (CRAR) of 12.0% and 15.1%, respectively, as on June 30, 2021 as against 9.5% and 12.8%, respectively, as on June 30, 2020 (12.0% and 14.9%, respectively, as on March 31, 2021). Further, the recent qualified institutional placement (QIP) of Rs 2,550 crore in August 2021, should also support the capital position.

The overall ratings continue to reflect the expectation of strong support from the majority stakeholder, GoI, and the established market position and comfortable resource profile of the bank. These strengths are partially offset by weak asset quality and modest earnings profile.

The rating on the tier I bonds (under Basel III) meets 'CRISIL's rating criteria for BASEL III-compliant instruments of banks'. CRISIL Ratings evaluates the bank's (i) reserves position (adjusted for any medium-term stress in profitability) and (ii) cushion over regulatory minimum CET1 (including CCB) capital ratios. Also evaluated is the demonstrated track record and management philosophy regarding maintenance of sufficient CET1 capital cushion above the minimum regulatory requirements.

The distinguishing features of non-equity tier I capital instruments (under Basel III) are the existence of coupon discretion at all times, high capital thresholds for likely coupon non-payment, and principal write-down (on breach of a pre-specified trigger). These features increase the risk attributes of non-equity tier I instruments over those of tier II instruments under Basel III, and capital instruments under Basel II. To factor in these risks, CRISIL Ratings notches down the rating on these instruments from the bank's corporate credit rating.

The factors that could trigger a default event for non-equity tier I capital instruments (under Basel III), resulting in non-payment of coupon, are: i) the bank exercising coupon discretion; ii) inadequacy of eligible reserves to honour coupon payment if the bank reports a loss or low profit; or iii) the bank breaching the minimum regulatory Common Equity Tier I (CET I; including the Capital Conservation Buffer) ratio. Moreover, given the additional risk attributes, the rating transition for non-equity tier I capital instruments (under Basel III) can potentially be higher and faster than that for tier II instruments.

In line with relief measures announced by the Reserve Bank of India (RBI) during the Covid-19 pandemic, BoI had provided a moratorium to its borrowers. Though collections declined during the initial months, they have inched up subsequently. However, the second wave of the pandemic led to intermittent lockdowns and localised restrictions, thus impacting collections once again. Although the impact has been moderate during this phase, any adverse change in payment discipline of borrowers may lead to higher delinquencies.

Under the schemes announced by the RBI dated January 1, 2019, February 11, 2020 and August 6, 2020, and the resolution framework for stressed accounts, BoI had restructured 3.2% of gross advances as on June 30, 2021. Pursuant to RBI's resolution framework 2.0 in May 2021, restructuring stands at 1.3% of gross advances; the ratio could be higher and is still under review. Nevertheless, the ability of the bank to manage collections and asset quality going forward this fiscal, is a key monitorable. Going forward too, the impact of the third wave of the pandemic, if and when it comes in terms of its spread, intensity and duration, will also be closely monitored.

Shares of Bank of India was last trading in BSE at Rs. 54.5 as compared to the previous close of Rs. 54.7. The total number of shares traded during the day was 608800 in over 3751 trades.

The stock hit an intraday high of Rs. 56.1 and intraday low of 54.4. The net turnover during the day was Rs. 33521865.

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