BOI''s asset quality moderate, says S&P; assigns BB+/ B rating

Chennai: Credit rating agency Standard & Poor's (S&P) Ratings Services today assigned its 'BB+/ B' counterparty credit ratings to Bank of India. While saying the outlook for the bank stable, S&P assigned its 'C' bank fundamental strength rating to Bank of India.

"The ratings on Bank of India reflect the bank's moderate asset quality and satisfactory funding position, which benefit from its respectable customer franchise and large national presence in its home market due to its majority ownership by the government," said S&P's credit analyst Adrian Chee. "Nevertheless, these factors are counterbalanced by its capitalisation, which although adequate, compares less favorably with large rated peers."

Bank of India is a leading bank in the Indian banking sector, with consolidated reported assets of Rs951 billion ($21.9 billion) as at March 31, 2005. The quality of Bank of India's loans, which are made up of about 60 per cent of its total assets, has improved in the year ended March 31, 2005. Nevertheless, its ratio of non-performing assets (NPAs; including three-month overdue loans, restructured loans, and foreclosed properties) stood at 9 per cent, higher than major domestic peers. Its NPA position, however, is expected to improve gradually through the bank's ongoing recovery efforts, write-offs, and disposal of distressed assets, even as it seeks to grow its lending business, and plans to increase provisioning coverage.

According to S&P, the Bank of India's underlying profitability is satisfactory, although it took a one-off loss when it transferred a portion of its government securities held as part of its statutory liquidity ratio requirements from the 'available-for-sale' category to the 'held-to-maturity' category. This was intended to insulate the investment portfolio against future interest rate volatility, and led to a one-off realised loss of Rs3.8 billion. As a result, Bank of India reported an after-tax return of 0.35 per cent in fiscal 2005, compared with 1.3 per cent in fiscal 2004.

Nevertheless, Bank of India has maintained its core profitability, with its net interest income ratio at a healthy 2.5 per cent, although this narrowed from 2.7 per cent in fiscal 2004. Going forward, Bank of India's focus on small and midsize enterprises and retail finance is expected to help boost interest margins, while non-interest income should be bolstered by its continued emphasis on trade finance and international operations. Profitability could, however, be slightly moderated by the bank's plans for increased provisions.

"The outlook on Bank of India partly reflects expectations that the bank will continue to maintain a stable financial profile amid challenges in the operating environment," said Chee. "Its financial profile will be underpinned by the bank's continued efforts to improve its asset quality through recovery and restructuring efforts, and initiatives to broaden its customer base and business diversification."