Moody’s Ratings (Moody’s), has affirmed the Baa3 long-term local, and foreign currency bank deposit ratings, of Punjab National Bank (PNB), Bank of Baroda (BOB), and Canara Bank (Canara).

Simultaneously, Moody’s, has upgraded the Baseline Credit Assessments (BCAs) of the three banks, to ba2 from ba3. Also, Moody’s has maintained the stable outlooks on the long-term ratings of all three banks.

Ratings rationale

The latest rating action, reflects the three banks’ improved credit metrics, and Moody’s view, that India’s strong operating environment, will continue to support their credit fundamentals over the next 12-18 months. 

The banks’ respective nonperforming loan (NPL) ratios have declined, supported by manageable household leverage, and healthy corporate balance sheets. Meanwhile, their improving profitability, will support capitalisation, despite strong loan growth, and higher risk weight requirements for unsecured lending, Moody’s has said.

The banks’ strong liquidity buffers, and low reliance on market funds, support their funding.

BOB’s, Canara’s and PNB’s NPL ratios, respectively declined to 2.9 per cent, 4.2 per cent and 5.7 per cent, as of March 31, 2024 from 3.8 per cent, 5.4 per cent, and 8.7 per cent, a year earlier, supported by lower slippages, as well as stronger recoveries, and higher write-offs. 

Although, their rapid growth of unsecured retail loans, will pose risks to their asset quality, such loans represent a small share of their total loans. The banks have also built adequate loan loss reserves, to buffer against future credit losses, according to Moody’s.

Their improved asset quality, has translated into higher profitability, because of lower credit costs. However, an increase in funding costs, will lead to some moderation in their profitability over the next 12-18 months.

The banks’ capitalisation, will remain stable over the next 12-18 months, amid high loan growth, Moody’s has said.

As of March 31, 2024, the Common Equity Tier 1 ratios of BOB, Canara, and PNB, were broadly stable from the year before at 12.5 per cent, 11.6 per cent, and 11.0 per cent, respectively.

Funding, and liquidity, will remain the banks’ key credit strengths, underpinned by their status as public sector banks in India, and linkages with the government, which result in good deposit franchises. 

At the same time, their respective liquid banking assets, as a proportion of tangible banking assets, have remained above 30 per cent in recent years.

Moody’s continues to assume a very high level of government support in the banks’ ratings, leading to a two-notch uplift in their Baa3 deposit ratings, from their ba2 BCAs.

Deposits ratings upgrade unlikely

An upgrade of PNB’s, BOB’s, and Canara’s Baa3 deposit ratings is unlikely, because, they are at the same level, as India’s Baa3 sovereign rating, Moody’s has said.