OREANDA-NEWS. Fitch Ratings has assigned Bank of India a Long-Term Issuer Default Rating (IDR) of 'BBB-' and Short-Term IDR of 'F3'. The agency has also assigned the bank a Viability Rating of 'bb-', Support Rating of '2' and Support Rating Floor of 'BBB-'. The Outlook on the IDR is Stable.

A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS

IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR

Bank of India's Long-Term IDR is at its Support Rating Floor of 'BBB-'. The Long-Term IDR is driven by its Support Rating of '2', which reflects Fitch's expectation that Bank of India is highly likely to receive extraordinary support from the Indian government due to its high systemic importance and the government's majority ownership. The bank's systemic importance stems from its large size, pan-India reach and sizeable share in system assets and deposits.

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.

VIABILITY RATING

Bank of India's Viability Rating (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.

The bank's NPL ratio rose to 13.1% at the end of the financial year to 31 March 2016 (FYE16) from 5.4% at FYE15, and its stressed asset ratio of 16.4% was higher than that of most large government banks at FYE16. The NPL ratio rose sharply, as did those of many of its peers, with 56% of Bank of India's outstanding restructured loans classified as NPLs following the Indian central bank's system-wide asset quality review. The proportion of restructured loans that were reclassified was among the highest in the sector. However, the bank's specific loan loss provision cover improved moderately to 44% at FYE16 from 39% at FYE15.

Credit costs rose by nearly 2.8 times in FY16 to 3.6% of loans, which outpaced the 1.5% increase in pre-provision profits (PPOP), which has historically been weaker than that of peers. The bank's reported loss of around INR61bn (USD918m) in FY16 was the highest among large government banks. Bank of India has set ambitious recovery targets for FY17. If achieved, earnings could rise, although a smaller PPOP 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% at FYE16. The bank's common equity Tier 1 (CET1) ratio was 8% at FYE16, an improvement from 7.2% a year earlier mainly due to contraction in its loan book and regulatory dispensation.

The government and other related agencies injected around INR41bn (13% 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 INR55bn in core equity in FY17, which should mitigate some pressure. 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.

SENIOR DEBT, SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The senior debt ratings of Bank of India are at the same level as their IDRs as the debts represent unsecured and unsubordinated obligations of the banks.

Legacy Upper Tier 2 bonds and perpetual Tier 1 bonds are rated three notches below the VR. The notching is in accordance with Fitch's assessment of each instrument's non-performance and loss-severity risk profiles and reflects some rating compression for VRs below 'bbb-'. These subordinated and hybrid debts are legacy instruments that are not Basel III-compliant.

RATING SENSITIVITIES

IDRS AND SENIOR DEBT

The Viability Rating on Bank of India is lower than its Support Rating Floor, and its Long-Term IDR may be downgraded if factors underpinning the Support Rating Floor weaken. A downgrade of India's sovereign rating will also trigger a downgrade of the bank's IDRs, which is at the same level as the sovereign rating. Likewise, a change in the sovereign's Outlook will also lead to a revision of the Outlook on the bank's IDR.

Any changes in the bank's IDRs would result in equivalent changes in the senior debt ratings.

VIABILITY RATING, SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Bank of India's Viability Rating (VR) is lower than those of many large government banks and reflects the bank's intrinsic risk profile. The current VR factors in periodic government capital injections, and their absence may weaken the bank's intrinsic financial position.

The bank's Upper Tier 2 and perpetual Tier 1 debt are all notched down from the VRs and will be sensitive to any change in the VRs.

SUPPORT RATING AND SUPPORT RATING FLOOR

The Support Rating and Support Rating Floor are determined by the agency's assessment of the government's propensity and ability to support a bank, based on the bank's relative size and systemic importance. A change in the government's ability to provide extraordinary support due to a change in the sovereign ratings would affect these ratings. The Support Rating and Support Rating Floor will also be impacted by any change in the government's propensity to extend timely support.

The rating actions are as follows:

Bank of India:

- Long-Term IDR assigned at 'BBB-'; Outlook Stable

- Short-Term IDR assigned at 'F3'

- Viability Rating assigned at 'bb-'

- Support Rating assigned at '2'

- Support Rating Floor assigned at 'BBB-'

- USD5bn medium-term note programme assigned 'BBB-' rating

- USD1.75bn senior notes assigned 'BBB-' rating

- USD240m Upper Tier 2 notes assigned 'B-' rating

- USD85m perpetual tier 1 bonds assigned 'B-' rating