Moody’s Investors Service on Tuesday retained the rating of Bank of Baroda (BoB) following government’s announcement of three-way merger with Vijaya Bank and Dena Bank.
“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 global rating agency said in a statement. The outlook on all ratings, where applicable, is stable, it said.
Last week, government had announced merger of BoB, Vijaya Bank and Dena Bank to create the country’s second largest lender by assets and branches. “The senior ratings of Baa3 are driven by BoB’s baseline credit adjustment (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,” it said.
Based on the three banks’ financials for Q1 of the fiscal year ending March 2019 (FY2019), it said, 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 non-performing assets ratio of the merged entity will register 12.4 per cent and 5.7 per cent respectively, while that of BoB is at 12.5 per cent and 5.4 per cent, it added. Similarly, the CET1 ratio of the proforma entity will register 9.3 per cent, while that of BoB is also at 9.3 per cent.
Profitability at the proposed entity will compare poorly with BoB, when we extrapolate the financials for first quarter of 2018-19, it said, adding the numbers were impacted by a particularly high level of provisioning at Dena Bank, with the credit costs at an annualised rate of 7.1 per cent.
At the same time, because the loan loss coverage at Dena Bank and also Vijaya Bank were lower than that for BoB, the profitability of the merged entity would be lower than what it expected for BoB over the next 12-18 months, assuming that the merged entity exists today, it said. Moody’s could downgrade BoB’s BCA if its asset quality or profitability deteriorate.