Fitch Ratings has assigned state-owned Bank of India (BoI) with a speculative credit quality rating on its creditworthiness, pointing at its already weak core capitalisation on account of high bad loans.
However, the long-term Issuer Default Rating (IDR) has been rated with a good credit quality of 'BBB-' with a stable outlook.
"Fitch Ratings has assigned BoI a Long-Term IDR of 'BBB-' and Short-Term IDR of 'F3'. The agency has also assigned the bank a Viability Rating of 'bb-'," the ratings firm said in a release.
Viability Rating (VR) measures intrinsic creditworthiness of a financial institution. 'bb' -- a speculative fundamental credit quality rating -- denotes moderate prospects for ongoing viability.
"Bank of India's VR is three notches lower than its IDR at 'bb-' and reflects the risks to its already weak core capitalisation from the bank's large stock of NPLs and stressed assets (comprising gross NPLs plus restructured loans) and its portfolio of vulnerable loans," it said.
Bank of India's non-performing loans (NPL) rose to 13.1 percent at the end of March 31, 2016, against 5.4 percent a year ago.
The bank's stressed asset ratio of 16.4 percent was higher than that of most large government banks in 2015-16.
In the last fiscal year 2015-16, BoI posted a net loss of Rs 6,089.21 crore, which was the highest among large government banks.
Citing BoI's ambitious recovery targets for the current fiscal, Fitch Ratings said, if achieved, earnings could rise, although a smaller pre-provision profits cushion and elevated credit costs will limit the recovery in earnings.
"In such a scenario, Bank of India's core capitalisation is weak and continues to be vulnerable to loan losses given net NPL to equity was 87 percent at the end of March, 2016," it added.
"The government and other related agencies injected around Rs 4,100 crore (13 percent of FY15 equity) in core capital in FY16. Fitch believes that more capital is necessary to shore up the balance sheet. The bank plans to raise around Rs 5,500 crore in core equity in FY17, which should mitigate some pressure", it added.
However, the government will likely have to shoulder a large part of the capital burden as flexibility to tap markets will be weak in the near-term, it said further.
On the long-term IDR rating of 'BBB-' on the bank, Fitch Ratings said it is driven by expectations that it will receive extraordinary support from Government due to tis high systemic importance and government's majority ownership.
"The stable outlook on the IDR mirrors the outlook on India's rating (BBB-/Stable). It reflects our view that there is no material change in the sovereign's ability to support banks in a situation of extraordinary stress", it added.
The bank's systemic importance stems from its large size, pan-India reach and sizable share in system assets and deposits, Fitch Ratings said.
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