Fitch affirms Bank of India IDR rating at BBB-; Outlook Negative

Fitch Ratings has affirmed Bank of India’s (BOI) Long-Term Issuer Default Rating (IDR) at BBB-, with a Negative Outlook. The agency has also affirmed the bank’s Viability Rating (VR) at b+, Support Rating Floor at BBB- and Support Rating at 2.

The Negative Outlook on the IDR mirrors the outlook on India’s sovereign rating of BBB-, which was revised to Negative from Stable on June 18, 2020 due to the impact of the escalating coronavirus pandemic on India’s economy.

The operating environment for Indian banks remains challenging despite a moderate revival in economic activity due to gradual easing of the lockdown since May 2020. Fitch revised India’s real GDP growth for the fiscal year ending March 2021 (FY21) to -10.5% from -5% in September 2020, but expects real GDP to return to growth of 11% in FY22, but largely as a result of the low base.

The economic contraction is likely to result in protracted weakness in banks’ asset-quality cycle, which could be manifested in much higher stressed loans and ultimately, more write-offs over the next few years, even though Indian banks’ Q2FY21 earnings present a more benign picture.

Fitch believes that a speedy economic recovery is critical for banks to rebound meaningfully, absent which we expect weak prospects for new business and revenue for the Indian banking sector in 2021.

“BOI’s Long-Term IDR of BBB- is driven by its Support Rating of '2' and Support Rating Floor of BBB-. It reflects Fitch’s expectation of a high probability of extraordinary government support, if required, due to the bank’s high systemic importance and state linkages. This is driven by its significant market share (nearly 4% of sector loans and deposits), pan-India franchise and 89.1% state ownership.

BOI's b+ VR is two notches below our assessment of the banking system’s operating environment score. There is a negative bias on the VR due to BOI’s above-average levels of impaired assets and less- than-satisfactory capital buffers, which are vulnerable to even moderate stress,” company shared Fitch Ratings rationale.