Fitch Affirms Bank of Baroda's IDR at 'BBB-'; VR Off Rating Watch Negative

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Fitch Affirms Bank of Baroda's IDR at 'BBB-'; VR Off Rating Watch Negative
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(The following statement was released by the rating agency) Fitch Ratings-Singapore-December 17: Fitch Ratings has affirmed Bank of Baroda's (BOB) Long-Term Issuer Default Rating (IDR) at 'BBB-' and its Viability Rating (VR) at 'bb'. Fitch has removed BOB's VR from Rating Watch Negative (RWN), on which it was placed in September 2018. The Outlook on the Long-Term IDR is Stable. The removal of the VR from RWN follows BOB's reporting of consolidated financial statements since its merger with two mid-sized state banks, Vijaya Bank (NS: VJBK ) and Dena Bank (NS: DENA ), in April 2019. The VR affirmation reflects that the bank's asset quality has remained broadly stable - albeit still weak - in the six months since the merger, while 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 2QFY20. However, Fitch expects BOB's overall performance to remain subdued given the weak macro environment and potential stress in the non-bank and real estate sectors in India, in line with our negative outlook on the banking sector. Bank of Baroda; Long Term Issuer Default Rating; Affirmed; BBB-; RO:Sta ; Short Term Issuer Default Rating; Affirmed; F3 ; Viability Rating; Affirmed; bb; RW: Off ; Support Rating; Affirmed; 2 ; Support Rating Floor; Affirmed; BBB- ----senior unsecured; Long Term Rating; Affirmed; BBB- Key Rating Drivers IDR, SUPPORT RATING, SUPPORT RATING FLOOR AND SENIOR DEBT Bank of Baroda's IDR is driven by its Support Rating Floor of 'BBB-', which is two notches higher than its VR of 'bb'. It reflects our expectations of the state's high propensity, but limited ability, to provide extraordinary support to the bank due to its high systemic importance, large share of system assets and deposits, and the state's 69% stake in the bank. The Stable Outlook mirrors the Outlook on India's sovereign rating (BBB-/Stable), reflecting our view of no significant change in either the sovereign's propensity or ability to support government banks like Bank of Baroda in the event of stress. The senior debt ratings of Bank of Baroda are at the same level as the IDR as the debt represents unsecured and unsubordinated obligations of the banks. VIABILITY RATING BOB'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, with the risk of downside if external pressures become a more binding constraint on the bank's less-than-satisfactory capital buffers. That said, the bank's key core financial metrics, particularly the impaired loans ratio and core capitalisation, have not experienced any material deterioration due to the merger, although its impaired loans ratio of 10.3% 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 (2QFYE20: USD1 billion; 4QFYE19: USD720 million), which somewhat restored the bank's core equity Tier 1 capital ratio (1HFYE20: 9.8%). Overall, net NPL/equity remains quite high at 35%, but it 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. BOB's earnings and profitability have improved since FYE19, with operating profit/risk weighted assets rising to 0.74% by the end of the first half of FY20 from 0.17% at FYE19, mainly supported by declining credit costs (1HFYE20: 78% of pre-provision profits; FY19: 95%). However income buffers remain weak. The bank's loans currently under its watch list (i.e. stressed but not yet impaired) form around 2% of loans, but it has a reasonably large exposure to non-banks. The bank's disclosure indicates only 3% of its total non-banks exposure are stressed, but this remains an area of heightened risk due to the continued liquidity stress in the real estate and non-bank financial sectors. RATING SENSITIVITIES IDRS, SUPPORT RATING, SUPPORT RATING FLOOR AND SENIOR DEBT BOB's IDRs are sensitive to factors underpinning its Support Rating and Support Rating Floor, including the agency's assessment of the government's propensity and ability to provide timely support to the bank, based on its size and systemic importance, as well as linkages to the state. A downgrade of India's sovereign rating will trigger a downgrade of the bank's Long-Term IDR, which is at the same level as that of the sovereign. Likewise, a change in our Outlook on the sovereign will also likely lead to a revision of our Outlook on the bank's Long-Term IDR. A sovereign rating upgrade may not lead to an upgrade in BOB's Long-Term IDR if we believe there has been any weakening of the sovereign's ability and propensity to support the bank. Any changes in the bank's IDR would result in equivalent changes to the senior debt rating. VR The VR is most sensitive to our assessment of BOB's appetite for risk. An increased risk appetite would likely manifest in rising impaired loans and profitability pressures, and would reverse the recovery process, thus leading to erosion in its equity base. Risks to the VR will increase if macro headwinds continue to rise and potential future capital injections are not sufficient to absorb the impact of any increase in NPLs and resultant higher provisioning. There is little prospect of an upgrade in the VR in the near term in light of the risk to the bank's intrinsic profile from rising external pressures. ESG Considerations Bank of Baroda's governance structure and financial transparency are each scored '4' out of '5' on Fitch's environmental, social and governance (ESG) scale, in line with other Indian state banks. It reflects our assessment that key governance aspects, such as board independence and effectiveness, ownership concentration, protection of creditor or stakeholder rights and related-party transactions, affect support prospects that drive the long-term ratings. They also affect the VRs, including the quality and frequency of financial reporting and auditing process. These factors have become more prominent in the past few years because of the sharp financial deterioration at state banks as well as the wide reported divergences in NPL recognition between the banks and the regulator. Contacts: Primary Rating Analyst Tania Gold , Senior Director +65 6796 7224 Fitch Ratings Singapore Pte Ltd. One Raffles Quay #22-11, South Tower Singapore 048583 Secondary Rating Analyst Saswata Guha, Director +91 22 4000 1741 Committee Chairperson Jon Cornish, Managing Director +852 2263 9901

Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: bindu.menon@fitchratings.com; Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com. Additional information is available on www.fitchratings.com Applicable Criteria Bank Rating Criteria (pub. 12 Oct 2018) https://www.fitchratings.com/site/re/10044408 Short-Term Ratings Criteria (pub. 02 May 2019) https://www.fitchratings.com/site/re/10073011 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10105521 Solicitation Status https://www.fitchratings.com/site/pr/10105521#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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