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Rating Action:

Moody's affirms all of Bank of Baroda's ratings

25 Sep 2018

Singapore, September 25, 2018 -- Moody's Investors Service has today affirmed the deposit ratings of Bank of Baroda (BOB) and the senior unsecured debt ratings of its bank's London branch.

Moody's has also affirmed the counterparty risk assessment and counterparty risk ratings of BOB and its London branch.

At the same time, Moody's has affirmed the bank's baseline credit adjustment (BCA) and adjusted BCA of the bank. All the short-term ratings of the bank and its London branch have also been affirmed.

The outlook on all ratings, where applicable, is stable.

The list of affected ratings is provided at the end of this press release.

RATINGS RATIONALE

This rating action follows the announcement by the Government of India (Baa2, stable) on 17 September 2018, that BOB, Vijaya Bank and Dena Bank will be merged into a single entity.

The senior ratings of Baa3 are driven by BOB's BCA of ba2 and a two-notch uplift due to systemic support, based on Moody's assumption that BOB will receive very high support from the Indian government in times of need.

Based on the three banks' financials for Q1 of the fiscal year ending March 2019 (FY2019), key credit metrics of the merged entity, with the exception of profitability, will be broadly similar to that of BOB. We calculate, the proforma gross and net nonperforming assets ratio of the merged entity will register 12.4% and 5.7% respectively, while that of BOB is at 12.5% and 5.4%. Similarly, the CET1 ratio of the proforma entity will register 9.3%, while that of BOB is also at 9.3%. Moody's points out that the results on funding and liquidity, the casa ratio, liquidity coverage ratio and loan-deposit ratio of the proposed merged entity will also prove broadly similar to that of BOB.

Profitability at the proposed entity will compare poorly with BOB, when we extrapolate the financials for Q1 FY2019. The Q1 numbers were impacted by a particularly high level of provisioning at Dena Bank, with the credit costs at an annualized rate of 7.1%. At the same time, because the loan loss coverage at Dena and also Vijaya were lower than that for BOB, the profitability of the merged entity would be lower than what Moody's expects for BOB over the next 12-18 months, assuming that the merged entity exists today.

A lower level of profitability compared to what Moody's currently expects would put negative pressure on BOB's BCA. This is especially relevant given that BOB's BCA is already under negative pressure on account of weak asset quality and profitability metrics.

Nevertheless, it is important to note that the profitability of the proposed merged entity before accounting for loan loss provisions is comparable to that of BOB and that the elevated credit costs at Dena is the reason for the negative outcome at the bottom line level.

The negative pressure on the BCA on account of lower profitability can also be alleviated if there is a meaningful capital infusion from the government. Moody's notes that in the merger announcement, the government said that it would provide capital support as required for the merged entity.

In addition, over the medium term, an enhanced scale of operations, if accompanied by better governance oversight, has the potential to structurally improve the merged entity's credit metrics.

Moody's currently assumes a very high level of support for BOB from the government, due to the government's ownership of the bank, BOB's relative size in the Indian banking system, as well as the systemic importance of the public sector banks as a group for the Indian financial system and economy.

The grounds for extending similar support for the proposed merged entity are even stronger. The proposed entity would have a market share in deposits of 7.2% compared to BOB's 5.0%, making it the second largest bank in the system by deposits.

Such an assumption on government support leads to a 2 notch uplift from its BCA, leading to the long-term ratings of the bank being affirmed at Baa3.

WHAT COULD MOVE THE RATING UP

Moody's could upgrade BOB's BCA, if there is a significant improvement in asset quality, driven by the resolution of existing nonperforming loans and leading to an improvement in profitability as credit costs decline.

The BCA would come under upward pressure if BOB's CET1 ratio improves meaningfully, driven by external capital raising.

And, Moody's would upgrade the bank's senior ratings if Moody's upgrades BOB's BCA.

WHAT COULD MOVE THE RATING DOWN

Moody's could downgrade BOB's BCA if its asset quality and/or profitability deteriorate.

Moody's would downgrade the bank's senior ratings if Moody's downgrades BOB's BCA by more than one notch.

The principal methodology used in these ratings was Banks published in August 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Bank of Baroda, headquartered in Baroda (Gujarat) and corporate office in Mumbai, reported total assets of INR7.1 trillion ($99 billion) at 30 June 2018.

List of affected ratings:

..Issuer: Bank of Baroda

.... Counterparty Risk Assessment, Affirmed Baa2(cr)/P-2(cr)

.... Counterparty Risk Rating (Local Currency), Affirmed Baa2/P-2

.... Short-term Deposit Ratings (Local and Foreign Currency), Affirmed P-3

.... Long-term Deposit Ratings (Local and Foreign Currency), Affirmed Baa3; outlook stable

.... Adjusted BCA and BCA, Affirmed ba2

.... Outlook is maintained at stable

..Issuer: Bank of Baroda (London)

.... Counterparty Risk Assessment, Affirmed Baa2(cr)/P-2(cr)

.... Counterparty Risk Rating (Local Currency), Affirmed Baa2/P-2

.... Senior Unsecured Medium-Term Note Program (Foreign Currency), Affirmed (P)Baa3

.... Senior Unsecured Regular Bond/Debenture (Foreign Currency), Affirmed Baa3; outlook stable

.... Outlook is maintained at stable

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Srikanth Vadlamani
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Graeme Knowd
MD - Banking
Financial Institutions Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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