India Ratings & Research (Ind-Ra) has assigned Bank of Baroda's (BOB) proposed upto Rs 20 billion Additional Tier I (AT1) perpetual debt instruments an 'AA+(exp)' rating. A full list of BOB's ratings is at end of the commentary. The final ratings are contingent upon the receipt of final documents conforming to the information already received.
The rating on AT1 instrument reflects BOB's strong stand-alone credit profile, which is better than that of almost all government owned (PSU) banks. Lowest credit costs among PSUs and best-in-class opex ratio, have helped BOB clock the highest RoA (0.69%) among public sector banks in FY14. BOB's common equity tier-1 (CET1) ratio at end-June 2014 was also healthy at 8.76% compared to a median of 7.7% for the other PSUs.
Ind-Ra recognizes the unique going-concern loss absorption features that these AT1 instruments carry and compares the 'coupon omission risk' and the 'write-down/conversion risk' to arrive at the final rating. For coupon omission risk, Ind-Ra's compares the 'distance to trigger' (CET1 buffer over the mandated RBI ratios, including capital conservation buffers but not factoring D-SIB and countercyclical buffers, that can trigger coupon omission by the issuer) over FY15 to FY19 with assumptions on asset growth, RoA trajectory and capital raising. This analysis places BOB among the top of the PSU bank hierarchy with a comfortable minimum CET1 buffer of 3.4 percentage points (pp) throughout this period as compared to a median buffer of 1.9pp for top 20 PSUs. Also, in terms of years of coupon servicing possible on estimated AT1 issuance through FY15-19, BOB appears to be very comfortably placed. Ind-Ra expects low likelihood of a coupon deferral trigger as it would entail almost no equity injection by the government and sustained RoA erosion over the life of the instrument, or a one-time annual loss of over 1.8% of assets.
In terms of write-down risk, assuming maintenance of minimum CET1 buffer over this transition period (including higher requirement for the bigger and systemically important banks), Ind-Ra expects BOB to require equity amounting to 43% of its current CET1 base compared to a median of 61% for the above peer-set. If we exclude government stake and compare this equity requirement in terms of current market capitalization, again BOB scores among the best with just 15% requirement compared to a median of 27% for the top20 PSUs.
The 'AA+ (exp)' rating therefore reflects the relatively lower likelihood of a coupon or principal loss to investors. However, the rating also differentiates these instruments from senior debt issued by the bank recognizing the discretionary going-concern loss-absorption features built into these instruments.
Shares of the company gained Rs 3.35, or 0.35%, to settle at Rs 952.70. The total volume of shares traded was 158,281 at the BSE (Wednesday).
