Slower economic growth, deteriorating asset quality and declining margins have prompted Moody’s Investors Service to downgrade the ratings and credit assessments of three major public sector banks — Bank of Baroda, Canara Bank and Punjab National Bank.

The global credit rating agency also changed the financial strength ratings of Union Bank of India to negative.

“The downgrades for Bank of Baroda, Canara Bank and Punjab National Bank, and the negative outlook to Union Bank of India primarily reflect the challenges of the current macroeconomic environment, which have been exacerbated by the depreciating rupee and high levels of inflation,” Moody’s said.

According to the rating agency, the Reserve Bank of India’s measures to support the currency have not reversed its depreciation, implying that interest rates may remain elevated for a longer time.

The deteriorating macroeconomic situation apart, Moody’s pointed to the worsening asset quality at Indian banks, with total non-performing assets and restructured loans rising above 8 per cent of their loan book and loan loss reserves coverage for these impaired loans under 25 per cent as of end-March 2013.

“These problem assets indicate a risk that capital ratios will remain under pressure; a situation which is compounded by the relatively low capacity of the banks for internal capital generation.

“Therefore, given their weak financial performances, several public sector banks have received repeated capital injections from the government in past years,” Moody’s said.

Shares of the four banks fell sharply on Friday. Canara Bank shares ended at Rs 224.15 per share on the BSE, down 9.96 per cent from the previous close, while Bank of Baroda fell 8.5 per cent at Rs 479.10.

Union Bank of India shares fell 5.98 per cent to Rs 112.35 and Punjab National Bank declined 7 per cent to Rs 500.05. The BSE Bankex fell 5.55 per cent to 10,800.62 points.

The benchmark Sensex dropped 3.97 per cent to 18,598.18 points.

deepa.nair@thehindu.co.in

(This article was published on August 16, 2013)
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