Moody's Investors Service has affirmed the local and foreign currency bank deposit ratings of seven Indian public sector banks (PSBs) at Baa3/Prime-3 The affected banks are: (1) Bank of Baroda (BOB), (2) Bank of India (BOI), (3) Canara Bank (Canara), (4) Oriental Bank of Commerce (OBC), (5) Punjab National Bank (PNB), (6) Syndicate Bank (Syndicate) and (7) Union Bank of India (Union Bank). The counterparty risk assessment (CRA) of these banks affirmed at Baa3(cr)/P-3(cr).
Moody's also downgraded the long term local and foreign currency bank deposit ratings of Indian Overseas Bank (IOB) and Central Bank of India (CBI) to Ba3 from Ba1. In addition, Moody's downgraded IOB and Indian Overseas Bank, Hong Kong Branch's senior unsecured medium-term note (MTN) program rating to (P)Ba3 from (P)Ba1 and IOB's Hong Kong branch's senior unsecured debt rating to Ba3 from Ba1. The long term CRA of these banks has also been downgraded to Ba2(cr) from Ba1(cr).
Moody's also downgraded the standalone credit profile or the baseline credit assessment (BCA) of Syndicate to ba3 from ba2, and as a result, downgraded the subordinated MTN and junior subordinated MTN program ratings of the bank to (P)Ba3 and (P)B1 from (P)Ba2 and (P)Ba3, respectively.
Moody's changed the outlook to stable from positive for BOB and its London branch, Canara and its London branch, PNB, and Syndicate and its London branch, changed the outlook to negative from positive for BOI and its London branch and Jersey branch, OBC, and Union Bank and its Hong Kong branch, and changed the outlook to stable from negative for IOB and its Hong Kong branch. Outlook for CBI was maintained at stable.
The list of affected ratings is provided at the end of this press release.
The ratings of State Bank of India (SBI, Baa3 positive, ba1) and IDBI Bank Ltd (IDBI, Ba2 ratings under review, caa1) are not affected by this rating action.
RATINGS RATIONALE
Moderation In The Level Of Government Support Factored Into Banks' Ratings
Moody's uses the joint default analysis (JDA) model to determine government support for banks. Under JDA, Moody's places each bank in a support bucket, which can be "very high", "high", "moderate", or "low". As a function of a government's sovereign credit rating and a bank's designated support bucket, JDA provides a range of potential notches of support.
Until this rating action, Moody's support assumptions were generally at the maximum of the "very high" support bucket range. With this rating action, Moody's has repositioned the support assumption towards the mid-point of the "very high" support bucket range. This means that typically the maximum rating uplift above the BCA is three notches.
Indian PSBs have experienced significant asset quality problems and capital shortages over the last three years. In 2015, the government announced its "Indradhanush" plan to address its own estimate of INR 1,800 billion shortfall in capital that PSBs would need between 2015 to 2019 to meet Basel III requirements. Under this plan, the government would allocate INR700billion for capital injections to public sector banks over the financial years ending in March 2016 to March 2019, with the expectation that banks could access the equity capital market for additional capital.
Despite receiving INR 500 billion in capital injections under the Indradhanush plan, PSBs remain undercapitalized and burdened by bad debts. The Indradhanush plan will only provide INR200bn of additional capital in the two financial years up to March 2019, which falls short of the amount still required for banks to address solvency challenges and recapitalize themselves. The government has not increased its planned capital injections, although most public sector banks have not been able to raise the required capital from the equity capital markets.
Other policies seem to indicate a gradual shift in approach. The introduction of the Financial Resolution and Deposit Insurance Bill, 2017, indicates the government's preference to introduce more market discipline in the resolution of financial institutions. A stated intention of the resolution framework is to limit the use of public money to bail out distressed entities.
These actions suggest that the extent of support that the government would provide to some banks is likely lower than what we had previously assumed. As a result, banks benefiting from the very highest levels of support are likely to see less support over time.
Nevertheless, Moody's continues to position the rated public sector banks in the "very high" support bucket, reflecting the systemic importance of public sector banks in India. The government owns a majority stake in these banks and is visibly involved in their management, including appointment of senior managers and setting of key performance indicators. In addition, the viability of public sector banks is crucial for maintaining overall systemic stability, given that these banks cumulatively account for around 74% of the banking system assets.
STABLE BUT WEAK BCAs; NEGATIVE PRESSURE FOR SOME BANKs
Moody's expect asset quality to remain the key credit weakness for the rated PSBs. Net non-performing loan (NPL) formation rates, while moderating compared to the levels seen in the last two years, will remain elevated on an absolute basis.
At the same time, the need to improve loan loss provisioning levels will require banks to maintain a high level of credit costs, leading to low profitability over the next 12-18 months.
Capital levels will remain weak for most rated PSBs over the next 12-18 months, as low profitability impinges on their ability to build capital levels through retained earnings. We expect the government to remain the key source of external capital for these banks.
Nevertheless, because their current BCA's incorporate considerations for solvency weakness described above, Moody's has affirmed the BCA's for eight banks. Despite weaker asset quality and capital metrics, the BCAs of rated public sector banks benefit from sound funding and liquidity metrics, with the liquidity coverage ratio (LCR) of all rated public sector banks at or above 100%.
At the same time, the BCAs of three banks remain weak and could face further downward pressure. The position of the BCAs at the top of the range indicates potential for a further deterioration to lead to a downward BCA adjustment. At the same time, Moody's has downgraded the BCA of Syndicate to ba3 from ba2.
DISCUSSIONS ON INDIVIDUAL BANK RATING ACTIONS
Bank of Baroda and Bank of Baroda (London)
Moody's has affirmed BOB's local and foreign currency bank deposit ratings at Baa3/Prime-3. Moody's has also affirmed Bank of Baroda (London) 's senior unsecured debt and senior unsecured medium-term note (MTN) program ratings at Baa3 and (P)Baa3. At the same time, Moody's has affirmed the bank's BCA and Adjusted BCA at ba2. Moody's has also affirmed the CRA of Baa3(cr)/Prime-3(cr) for both the bank and London Branch. The outlook, where applicable, has been revised to stable from positive.
The affirmation of BOB's BCA and ratings reflects our expectation that the financial profile will broadly remain stable over the next 12-18 months. Asset quality has largely stabilized and new NPL formation has moderated in the financial year ended March 2017 (FY 2017). New NPL formation has meaningfully declined in FY 2017 and we expect further improvements in the next financial year. BOB's capitalization profile is also somewhat stronger than that of its peers and we expect the bank may be able to raise external capital from the equity capital market if its financial profile stabilizes further. In addition, we expect improvement in the profitability profile as credit costs will gradually come down given the relatively stronger loan loss coverage and our expectation of a stable asset quality. We expect funding and liquid profile to remain stable and support the overall financial profile.
The outlook on the bank's ratings has been revised to stable from positive to reflect some moderation in our expectation of extra ordinary support from the Indian government.
What could change the rating up:
Given the stable outlook, BOB's ratings are unlikely to face upward pressure in the next 12-18 months. However, the outlook could be revised to positive if the bank is able to improve its profitability profile on a sustainable basis, and or if the bank's capital position is significantly strengthened by way of external capital.
What could change the rating down:
Downward pressure on BOB's rating will arise if further credit losses worsen its capital position. Any indication that government support has diminished beyond what we anticipate in this rating action could also lead to a downgrade of the bank's ratings.
Bank of India; Bank of India (London) and Bank of India, Jersey Branch
Moody's has affirmed BOI's local and foreign currency bank deposit ratings at Baa3/Prime-3. Moody's has also affirmed the bank and its branches, Bank of India (London) and Bank of India, Jersey Branch's foreign currency senior unsecured medium-term note (MTN) program rating at (P)Baa3. For the London and Jersey branches, Moody's has affirmed the foreign currency senior unsecured debt ratings at Baa3. The outlook, where applicable, has been revised to negative from positive.
At the same time, Moody's affirmed the bank's BCA and Adjusted BCA at ba3. As a result, Moody's affirmed the bank and the London and Jersey branch's subordinate MTN program rating at (P)Ba3. In addition, Moody's has affirmed the bank's preferred stock (non-cumulative) rating of B3(hyb). For the Jersey branch, Moody's has also affirmed the foreign currency junior subordinate MTN program rating at (P)B1.Moody's has affirmed the bank and its branches' CRA at Baa3(cr)/ P-3(cr).
The affirmation of the bank's ratings with a negative outlook reflects the negative pressures on the BCA in light of the recent deterioration in asset quality as well as expectation of pressure on the bank's profitability as it continues to build its loan loss buffers. Nevertheless, we note that loan loss provisioning coverage is somewhat better than that of its peers and as such the negative impact on profitability may be limited as the underlying asset quality stabilizes. In addition, the bank's capitalization profile is somewhat weaker and the ability to generate internal capital is limited. As such, we expect BOI will be dependent on capital infusion from the Indian government. Nevertheless, we expect funding and liquid profile to remain stable and support the overall financial profile.
The negative outlook on BOI's ratings also reflects some moderation in our expectation of extra ordinary support from the Indian government given the issues outlined earlier in this press release. As such, BOI's BCA and ratings could be downgraded during the outlook horizon to reflect these factors.
What could change the rating up:
Given the negative outlook, BOI's ratings are unlikely to face upward pressure in the next 12-18 months. However, the outlook could be revised to stable if the bank returns to profitability on a sustainable basis, and or the capital position is significantly strengthened by way of external capital.
What could change the rating down:
BOI's ratings could be downgraded if further credit losses worsen its capital position. Any indication that government support has diminished beyond what we anticipate in this rating action could also lead to a downgrade of the bank's ratings.
Canara Bank and Canara Bank, London Branch
Moody's has affirmed Canara's local and foreign currency bank deposit ratings at Baa3/Prime-3. Moody's has also affirmed Canara Bank, London Branch's senior unsecured debt and senior unsecured medium-term note (MTN) program ratings at Baa3/(P)Baa3. The outlook, where applicable, has been revised to stable from positive.
At the same time, Moody's has affirmed the bank's BCA and Adjusted BCA at ba3. As a result, Moody's affirmed the London branch's foreign currency subordinated and junior subordinate MTN program ratings at (P)Ba3 and (P)B1 respectively. Moody's has also affirmed the CRA of Baa3(cr)/Prime-3(cr) for both the bank and London Branch.
The affirmation of the Canara's BCA and ratings reflects our expectation that the bank's financial profile will broadly remain stable over the next 12-18 months. Asset quality has largely stabilized and new NPL formation has moderated in the financial year ended March 2017. Given the amount of recognition done over the last 2-3 years, we expect the pace of new NPL formation to gradually slow down. While the capitalization profile of the bank has improved, it is weaker than global peers and as such we expect the bank to remain dependent on capital infusion from the Indian government. In addition, profitability profile will remain under pressure as it continues to builds provisioning buffer. Nevertheless, we expect the bank's funding and liquid profile to remain stable and support the overall financial profile.
The outlook on the bank's ratings has been revised to stable from positive to reflect some moderation in our expectation of extra ordinary support from the Indian government.
What could change the rating up:
Given the stable outlook, Canara's ratings are unlikely to face upward pressure in the next 12-18 months. However, the outlook could be revised to positive if the bank is able to improve its profitability profile on a sustainable basis, and or capital position is significantly strengthened by way of external capital.
What could change the rating down:
Downward pressure on Canara's rating will arise if further credit losses worsen its capital position. Any indication that government support has diminished beyond what we anticipate in this rating action could also lead to a downgrade of the bank's ratings.
Moody's has downgraded CBI's long term local and foreign currency bank deposit ratings to Ba3 from Ba1. At the same time, Moody's has affirmed the bank's BCA and Adjusted BCA at b3. Moody's has also downgraded the bank's long term CRA to Ba2(cr) from Ba1(cr). The short-term local and foreign currency bank deposit rating was affirmed at Not-Prime and the banks' short-term CRA was affirmed at Not-Prime(cr). The outlook, where applicable, is maintained at stable.
The downgrade of CBI's long-term deposit ratings reflect the banks's weak BCA of b3 and some moderation in our expectation of extra ordinary support from the Indian government given the issues outlined earlier in this press release. As such, the uplift from the BCA has been lowered to three notches compared to the earlier five notches.
At the same time, the affirmation of the BCA at b3 reflects our expectation that CBI's financial profile will broadly remain stable, although very weak, over the next 12-18 months. Asset quality has largely stabilized and new NPL formation has moderated in the financial year ended March 2017. Given the amount of recognition done over the last 2-3 years, we expect the pace of new NPL formation to gradually slow down. While the capitalization profile of the bank has improved, continued losses will exert pressure on the capital levels. Despite severe pressure on its solvency profile, the bank's funding and liquidity have remained stable and support the overall financial profile. We note that the bank has been placed under prompt corrective action by the Reserve Bank of India (RBI). As such, we expect greater regulatory scrutiny by the RBI, but that should not negatively impact the CBI's performance.
What could change the rating up:
Given the stable outlook, CBI's ratings are unlikely to face upward pressure in the next 12-18 months. However, the outlook could be revised to positive if the bank returns to profitability on a sustainable basis, and or the capital position is significantly strengthened by way of external capital.
What could change the rating down:
Downward pressure on CBI's rating will arise if further credit losses worsen its capital position. Any indication that government support has diminished beyond what we anticipate in this rating action could also lead to a downgrade of the bank's ratings.
Indian Overseas Bank and Indian Overseas Bank, Hong Kong Branch
Moody's has downgraded IOB's long term local and foreign currency bank deposit ratings to Ba3 from Ba1. Moody's has affirmed IOB's short term foreign currency bank deposit ratings at Not Prime. Moody's has also affirmed the bank and its branch, Indian Overseas Bank, Hong Kong Branch's other short term program rating at (P)Not Prime. Moody's has downgraded the bank and its branch's senior unsecured medium-term note (MTN) program rating to (P)Ba3 from (P)Ba1. Moody's has also downgraded the branch's senior unsecured debt rating to Ba3 from Ba1. The outlook, where applicable, has been revised to stable from negative.
At the same time, Moody's affirmed the bank's BCA and Adjusted BCA at b3. As a result, Moody's affirmed the bank and the Hong Kong branch's subordinate and junior subordinate MTN program rating at (P)B3 and (P)Caa1 respectively. Moody's has downgraded the bank and its branch's long term CRA to Ba2(cr) from Ba1(cr). The short-term CRA was affirmed at NP(cr).
The downgrade of IOB's ratings reflect the bank's weak BCA of b3 and some moderation in our expectation of extra ordinary support from the Indian government given the issues outlined earlier in this press release. As such, the uplift from the BCA has been downgraded to three notches compared to the earlier five notches.
At the same time, the affirmation of the bank's BCA at b3 reflects our expectation that IOB's financial profile will broadly remain stable, although very weak, over the next 12-18 months. Asset quality has largely stabilized and new NPL formation has moderated in the financial year ended March 2017. Given the amount of recognition done over the last 2-3 years, we expect the pace of new NPL formation to gradually slow down. While the capitalization profile of the bank has improved, continued losses will exert pressure on the capital levels. As such we expect the bank to remain dependent on capital infusion from the Indian government. Despite severe pressure on its solvency profile, the bank's funding and liquidity have remained stable and support the overall financial profile. We note that the bank has been placed under prompt corrective action by the RBI. As such, we expect greater regulatory scrutiny by the RBI, but that should not negatively impact IOB's performance.
What could change the rating up:
Given the stable outlook, IOB's ratings are unlikely to face upward pressure in the next 12-18 months. However, the outlook could be revised to positive if the bank returns to profitability on a sustainable basis, and or the capital position is significantly strengthened by way of external capital.
What could change the rating down:
IOB's ratings could be downgraded if further credit losses worsen its capital position. Any indication that government support has diminished beyond what we anticipate in this rating action could also lead to a downgrade of the bank's ratings.
Oriental Bank of Commerce
Moody's has affirmed OBC's local and foreign currency bank deposit ratings at Baa3/Prime-3. At the same time, Moody's has affirmed the bank's BCA and Adjusted BCA at ba3. Moody's has also affirmed the bank's CRA at Baa3(cr)/ Prime-3(cr). The outlook, where applicable, has been changed to negative from positive.
The affirmation of OBC's ratings with a negative outlook reflects the negative pressures on the BCA in light of the recent deterioration in asset quality as well as expectation of pressure on profitability as it continues to build its loan loss buffers. Nevertheless, we expect the bank's funding and liquidity profile to remain stable and support the overall financial profile.
The negative outlook on the bank's ratings also reflects some moderation in our expectation of extra ordinary support from the Indian government given the issues outlined earlier in this press release. As such, the bank's BCA and ratings could be downgraded during the outlook horizon to reflect these factors.
What could change the rating up:
Given the negative outlook, OBC's ratings are unlikely to face upward pressure in the next 12-18 months. However, the outlook could be revised to stable if the bank returns to profitability on a sustainable basis, and or the capital position is significantly strengthened by way of external capital.
What could change the rating down:
OBC's ratings could be downgraded if further credit losses worsen its capital position. Any indication that government support has diminished beyond what we anticipate in this rating action could also lead to a downgrade of the bank's ratings.
Punjab National Bank
Moody's has affirmed PNB's local and foreign currency bank deposit ratings at Baa3/Prime-3. Moody's has also affirmed the bank's foreign currency issuer rating at Baa3. At the same time, Moody's has affirmed the bank's BCA and Adjusted BCA at ba3. Moody's has also affirmed the bank's CRA at Baa3(cr)/ Prime-3(cr). The outlook, where applicable, has been changed to stable from positive.
The affirmation of the PNB's BCA and ratings reflects our expectation that the bank's financial profile will broadly remain stable over the next 12-18 months. Asset quality has largely stabilized and new NPL formation has moderated in the financial year ended March 2017. Given the amount of recognition done over the last 2-3 years, we expect the pace of new NPL formation to gradually slow down. The capitalization profile of the bank is weaker than global peers, nevertheless we note that the bank has potential to release capital from the sale of non-core assets such as its housing finance subsidiary. Nevertheless, given weak equity market valuation, we expect the bank will remain dependent on capital infusion from the Indian government. In addition, the bank's profitability profile will gradually improve given the strong pre-provisioning profits and some moderation in credit costs compared to the past two years in line with our view of stable asset quality. The banks funding and liquidity profile remain stable and are key strengths of its financial profile.
The outlook on the bank's ratings has been revised to stable from positive. This reflects some moderation in our expectation of extra ordinary support from the Indian government given the issues outlined earlier in this press release.
What could change the rating up:
Given the stable outlook, PNB's ratings are unlikely to face upward pressure in the next 12-18 months. However, the outlook could be revised to positive if the bank is able to improve its profitability profile on a sustainable basis, and or the capital position is significantly strengthened by way of external capital.
What could change the rating down:
Downward pressure on PNB's rating will arise if further credit losses worsen its capital position. Any indications that government support has diminished beyond what we anticipate in this rating action could also lead to a downgrade of the bank's ratings.
Syndicate Bank and Syndicate Bank, London Branch
Moody's has affirmed Syndicate Bank's (Syndicate) local and foreign currency bank deposit ratings at Baa3/Prime-3. Moody's has also affirmed the bank and its branch's senior unsecured medium-term note (MTN) program rating at (P)Baa3. Moody's has also affirmed the branch's senior unsecured debt rating at Baa3. The outlook, where applicable, has been revised to stable from positive.
At the same time, Moody's has downgraded the bank's BCA and Adjusted BCA to ba3 from ba2. As a result, Moody's has also downgraded the bank and the London branch's subordinate and junior subordinate MTN program rating to (P)Ba3 from (P)Ba2 and to (P)B1 from (P)Ba3 respectively. Moody's has affirmed the bank and its branch's CRA at Baa3(cr)/ Prime-3(cr).
The downgrade of the BCA reflects the deterioration in Syndicate's financial performance due to asset quality deterioration as well as expectation of pressure on the profitability profile as it continues to build its loan loss buffers. In addition, the bank's capitalization profile is somewhat weaker than other similarly rated peers and its ability to generate internal capital is limited. As such, we expect the bank will be dependent on capital infusion from the Indian government. Nevertheless, we expect funding and liquid profile to remain stable and support the overall financial profile.
What could change the rating up:
Given the stable outlook, Syndicate's ratings are unlikely to face upward pressure in the next 12-18 months. However, the outlook could be revised to positive if the bank is able to improve its profitability profile on a sustainable basis, and or the capital position is significantly strengthened by way of external capital.
What could change the rating down:
Downward pressure on Syndicate's rating will arise if further credit losses worsen its capital position. Any indications that government support has diminished beyond what we anticipate in this rating action could also lead to a downgrade of the bank's ratings.
Union Bank of India and Union Bank of India, Hong Kong Branch
Moody's has affirmed Union Bank of India's (Union Bank) local and foreign currency bank deposit ratings at Baa3/Prime-3. Moody's has also affirmed the bank and its branch's senior unsecured medium-term note (MTN) program rating at (P)Baa3. Moody's has also affirmed the branch's senior unsecured debt rating at Baa3. The outlook, where applicable, has been revised to negative from positive.
At the same time, Moody's has affirmed the bank's BCA and Adjusted BCA at ba3. As a result, Moody's has also affirmed the bank and the Hong Kong branch's subordinate and junior subordinate MTN program rating at (P)Ba3 and (P)B1. Moody's has affirmed the bank and its Hong Kong branch's CRA at Baa3(cr)/ Prime-3(cr).
The affirmation of the banks' ratings with a negative outlook reflects negative pressures on the BCA in light of the recent deterioration in asset quality as well as expectation of pressure on profitability profile as it continues to build its loan loss buffers. In addition, Union Bank's capitalization profile is weaker than other rated peers in India. Nevertheless, we expect funding and liquid profile to remain stable and support the overall financial profile.
The negative outlook on the bank's ratings also reflects some moderation in our expectation of extra ordinary support from the Indian government given the issues outlined earlier in this press release. As such, Union banks' BCA and ratings could be downgraded during the outlook horizon to reflect these factors.
What could change the rating up:
Given the negative outlook, Union Banks' ratings are unlikely to face upward pressure in the next 12-18 months. However, the outlook could be revised to stable if the bank returns to profitability on a sustainable basis, or if the banks' capital position is significantly strengthened by way of external capital.
What could change the rating down:
Union Bank's ratings could be lowered if further credit losses worsen its capital position. Any indication that government support has diminished beyond what we anticipate in this rating action could also lead to a downgrade of the bank's ratings.
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