The strengthening of Punjab National Bank’s capital due to sale of 13 per cent stake in PNB Housing Finance for ₹1,850 crore is credit positive, said Moody’s Investors Service.
The global credit rating agency has estimated that the sale will increase PNB’s Common Equity Tier 1 (CET1) ratio by about 40 basis points from the 6.9 per cent reported in December 2018. Coupled with the recent government capital infusion in February 2019, which increased the bank’s pro forma CET1 ratio by around 150 basis points, the overall pro forma ratio is nearly 9 per cent.
Moody’s observed that the bank’s pro forma CET1 ratio comfortably exceeds the Basel III March 2019 regulatory requirement of 7.375 per cent, which includes a minimum CET1 requirement of 5.5 per cent and a capital conservation buffer of 1.875 per cent.
“Upon completion of the sale, PNB will retain a 19.8 per cent stake in PNB Housing Finance worth around ₹3,000 crore. The stake will remain a key potential source of capital for PNB, given its limited access to the equity capital markets following the substantial decline in its share price over the past year.
“We estimate that a sale of the remaining stake at a valuation similar to the current deal would increase PNB’s CET1 ratio by approximately 70 basis points,” said the agency in a statement.
Fraudulent deals
Moody’s elaborated that the late March stake sale provided timely support to the bank’s capitalisation, which has been challenged by high credit costs and investment losses, in addition to the negative effect of fraudulent transactions PNB discovered between February and March 2018.
Despite the bank’s losses over the past few quarters, PNB’s reported CET1 ratio has improved as a result of government capital infusion and a reduction in risk-weighted assets, it added.
“PNB’s core profitability remains robust, given its strong franchise as one of the leading public sector banks in India, supported by a superior funding profile and strong net interest margins. We expect the bank’s internal capital generation to improve gradually as declining credit costs alleviate pressure on its capitalisation over the next 12-18 months,” the agency said.