Moody’s downgrades four PSBs, changes outlook on PNB

“Prolonged financial stress among households, weak job creation and a credit crunch among non-bank financial companies will lead to a rise in non-performing loans, delaying the ongoing clean-up of banks’ balance sheets,” Moody’s said.

Moody’s on Friday said it has concluded its review of five public sector banks (PSBs) and downgraded four of them amid a deepening economic slowdown. It downgraded the long-term local and foreign currency deposit ratings of Bank of Baroda (BoB), Bank of India (BoI), Canara Bank and Union Bank of India to Ba1 from Baa3, and their baseline credit assessments (BCAs) to b1 from ba3. Moody’s also changed its outlook on Punjab National Bank (PNB) to negative from stable.

At the same time, the agency has affirmed PNB’s long-term local and foreign currency deposit ratings at Ba1 and its BCA at b1. It attributed changes to the economic shock from the coronavirus pandemic, which is exacerbating an already material slowdown in India’s economic growth, weakening borrowers’ credit profiles and hurting banks’ asset quality.

“Prolonged financial stress among households, weak job creation and a credit crunch among non-bank financial companies will lead to a rise in non-performing loans, delaying the ongoing clean-up of banks’ balance sheets,” Moody’s said.

The BCA downgrades take into consideration rising risks to the banks’ asset quality as a result of the severe economic contraction, which will result in an increase in credit costs. This increase in credit costs will hurt profitability and also strain the banks’ modest capitalisation, reversing recent improvements. Funding and liquidity continue to be key credit strengths given their status as PSBs, which results in good deposit franchises, Moody’s said.

The banks’ Ba1 long-term local and foreign currency deposit ratings incorporate three notches of uplift from their b1 BCAs to reflect Moody’s assumption of a very high probability of support from the government in times of need. “Moody’s assumption takes into account the banks’ deposit market shares as well as their linkages with the government, including by way of ownership,” the agency said.

The affirmation of PNB’s Ba1 long-term local and foreign currency deposit ratings, which incorporates a three-notch uplift for government support from its b1 BCA, reflects Moody’s expectation that deteriorating asset quality and profitability will weigh on its capitalisation. However, PNB’s financial metrics had been improving before the economic slowdown, which, combined with the bank’s good funding and liquidity, mitigate the negative impact on its credit profile of deteriorating asset quality and profitability. “The three-notch uplift for government support reflects PNB’s deposit market share as well as its linkages with the government,” Moody’s said. The negative outlook factors in further downside risks to the banks’ financial profiles because of India’s uncertain operating environment.

Moody’s will subsequently withdraw the ratings of BoI and Bank of India (London) “for its own business reasons”.