Moody's Investors Service has affirmed Bank of Baroda 's (BOB) long-term deposit ratings at Baa3 while upgrading its Baseline Credit Assessment (BCA) by one notch to ba1. This rating action comes as part of Moody's broader review of banks in South and Southeast Asia following the update of its Banks methodology.

Key Rating Actions

• Long-term deposit ratings affirmed at Baa3
• Baseline Credit Assessment (BCA) upgraded to ba1 from ba2

Rationale for Rating Actions

The affirmation of Bank of Baroda's Baa3 ratings reflects Moody's expectation of a very high probability of support from the Government of India (rated Baa3 stable) in times of need. This government support results in a one-notch uplift from the bank's standalone credit profile, as represented by its BCA.

The upgrade of BOB's BCA to ba1 is attributed to two main factors:

1. Improved asset quality
2. Strengthened capitalization

These improvements are partly due to the updated ratio definition and scoring calibration for the Capital subfactor in Moody's revised Banks methodology.

Factors That Could Lead to Rating Changes

Potential for Upgrade

Moody's could upgrade Bank of Baroda's BCA if the bank demonstrates:

• Improvement in its Tangible Common Equity (TCE) to Risk-Weighted Assets (RWA) ratio to above 14%
• Increase in its net income to tangible assets ratio to above 1.30% on a sustained basis
• Maintenance of other credit fundamentals

Potential for Downgrade

Conversely, BOB's ratings could face downgrade pressure if:

• India's sovereign rating is downgraded
• There is a multi-notch downgrade of the bank's BCA

The BCA could be downgraded if:

• The bank's loan growth accelerates significantly above system loan growth, posing risks to asset quality
• TCE/RWA ratio declines to below 10.50%
• Net income to tangible assets ratio falls below 0.50% on a sustained basis

Methodology and Regulatory Disclosures

Moody's used its updated Banks methodology as the primary methodology for these ratings. The updated methodology maintains Moody's overall approach but includes changes to the BCA framework, such as updated ratio definitions and scoring calibrations for Capital, Funding Structure, and Liquid Resources subfactors.

Bank of Baroda's "Assigned BCA" of ba1 is set two notches below the "Financial Profile" initial score of baa2. This adjustment reflects the bank's high single-name borrower concentration risk, unseasoned risks due to rapid expansion in retail lending, and modest track record of managing asset quality and profitability across credit cycles.

This rating action is part of a broader review affecting multiple banks in South and Southeast Asia, including DBS Group Holdings Ltd, Oversea-Chinese Banking Corporation Limited, Punjab National Bank, and Canara Bank, among others.

Investors and stakeholders are advised to refer to the full Moody's press release for comprehensive details on the rating actions and methodology.

Bank of Baroda (BoB) shares surged 5% to reach an all-time high of ₹292.75 following the release of its July-September quarter (Q2) results, buoyed by strong performance and positive analyst sentiment. The state-owned lender's robust showing prompted multiple brokerages to upgrade their ratings and price targets.

Key Highlights

• Share price reached an all-time high of ₹292.75, up 5%
• Net Interest Margin (NIM) increased by 5 basis points to 2.96%
• Net Interest Income (NII) grew 2.7% year-on-year to ₹11,954.00 crore
• Profit After Tax (PAT) at ₹4,809.00 crore, down 8.2% year-on-year but up 6% sequentially
• Return on Assets (RoA) improved to 1.07%

Analyst Upgrades

Several brokerages have revised their outlook on Bank of Baroda following the Q2 results:

Financial Performance

Bank of Baroda's Q2 results showcased resilience in key financial metrics:

The bank's performance was particularly noteworthy given the challenging economic environment. The 5 basis-point increase in net interest margin to 2.96% defied expectations of a decline, demonstrating the bank's ability to maintain profitability.

Asset Quality and Loan Growth

Bank of Baroda reported improvements in asset quality, with provisions dropping significantly by 49% year-on-year to ₹883.00 crore. This reduction in provisions, coupled with broad-based loan growth, has been highlighted by analysts as a key positive for the bank.

Income and Expenses

While the bank saw growth in its core income, there were some pressure points:

• Other income decreased by 31.96% year-on-year to ₹3,514.90 crore
• Operating expenses decreased by 5.56% year-on-year to ₹9,125.10 crore
• The Cost-to-Income ratio showed improvement, indicating better operational efficiency

Outlook

Analysts have pointed out several positive factors in Bank of Baroda's performance:

1. Broad-based loan growth of 12%
2. Steady asset quality
3. Improved return on assets at 1.07%

However, some areas of concern include:

1. Flat fee income despite loan growth
2. A 90 basis point sequential decline in CASA (Current Account Savings Account) ratio

The bank's ability to maintain its net interest margin in a challenging interest rate environment has been particularly praised by market observers.

As Bank of Baroda continues to navigate the evolving financial landscape, investors and analysts will be closely watching its ability to sustain this growth momentum and further improve its asset quality in the coming quarters.