By Udit Kariwala

India Ratings and Research (Ind-Ra) has taken the following rating actions on Punjab National Bank (PNB):

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Long-Term Issuer Rating

-

-

-

-

IND AAA/Stable

Affirmed

Short-Term Issuer Rating

-

-

-

-

IND A1+

Affirmed

Basel III Tier 2 bonds*

-

-

-

INR30

IND AAA/Stable

Affirmed

AT1 bonds*

-

-

Perpetual

INR45**

IND AA+/Negative

Affirmed

Proposed AT1 bonds

-

-

Perpetual

INR22.5

IND AA+/Negative

Assigned

Senior Infrastructure bonds

 

9 February 2015

 

8.23

 

9 February 2025

 

INR20

IND AAA/Stable

Affirmed

*Details of Basel III Tier 2 and Basel III Additional Tier I bonds are given in Annexure.
**Out of the INR45 billion rated amount, the bank has only raised INR37.5 billion. 

The Outlook revision for AT1 bonds reflects the structural weakening of PNB’s standalone profile, likely elevated levels of credit costs, stretched profitability, limited visibility on a meaningful capital infusion and the bank’s inability to timely garner equity capital by monetising its non-core assets in line with similar rated peers. For AT1 instruments, the agency considers discretionary component, coupon omission risk and write-down/conversion risk as key parameters to arrive at a rating. The agency recognises the unique going-concern loss absorption features that these bonds carry and differentiates them from the bank’s senior debt, factoring in a higher probability of an ultimate loss for investors in these bonds.
 

The affirmation reflects Ind-Ra’s expectation of continued strong support from the government of India (GoI), in view of the GoI’s majority government ownership of PNB (65% at end-June 2017) and PNB’s systemic importance as the second-largest government-owned bank and fourth-largest bank including private banks by asset market share (market share of 5.3% at FYE17). The bank also has the second-largest branch network in the country – second only to State Bank of India’s (
‘IND AAA’/Stable). 

PNB’s stronger pre-provision profit margins and improved funding profile and liability franchise place it among the highest rated public sector banks (PSBs). PNB also has a stronger distributable reserve position than most of its peers’ (FYE17: 5.8% of risk weighted assets; PSB median: 4.8%), which can cover a minimum of 42 years of coupon servicing at any time, according to Ind-Ra’s estimate. The agency further estimates PNB would need INR61.3 billion of Tier I capital (assuming a CAGR growth of 8% over FY18-FY19) to maintain a Tier I ratio of 10% (including a capital conservation buffer of 2.5%) by FYE19.

KEY RATING DRIVERS

Impaired Ability to Add Capital through Internal Accruals: PNB’s operating metrics have deteriorated in the last few quarters on account of pressures on its asset quality, consequently impacting the strength of its earning profile. Its large stock of stressed corporates, where the provision requirement could be significant, incremental provisioning, on account of ageing of its NPLs and the Reserve Bank of India identified accounts for reference to Insolvency and Bankruptcy Code, could keep pressure on its profit and loss account for FY17-FY18. This would impact the bank’s ability to add capital through internal accruals. Moreover, PNB has lower provision coverage of 41%  compared with ‘IND AAA’ rated peers’ (median 45%), which would also add to the overall pressure on the profitability over the next 12-18 months. 

Asset Quality Overhang to Persist:
PNB’s higher share of exposure to stressed sectors such as infrastructure and iron & steel along with sizeable single name concentration towards highly levered corporate groups makes it more vulnerable to asset quality challenges than a few of its peers. Also, its legacy concentrations will remain an overhang in the near term, given the sluggish pace of economic recovery. According to Ind-Ra, the stock of stressed corporates with low provisioning remains high for PNB, with its stressed assets to total loans at 15.2% as of March 2017. Incrementally, the bank is making efforts to increase the share of low ticket size, low risk weight business segments. Higher-than-expected deterioration in the profitability in the short term along with inability to shore up adequate capital could further strain the standalone profile and attract a negative rating action. 

Strong Liability Engine with Focus on Recovery
: Over FY11-FY17, PNB maintained its current account and savings account (CASA) market share at around 6.4% – unlike most PSBs – on account of a branch-expansion-focused strategy in geographies with high growth and low branch penetration. PNB’s CASA ratio compares to best in class, with a domestic CASA ratio 46% at FYE17. PNB’s depth in the liability franchise stems from the bank adding almost twice the amount of savings deposits compared to its similar sized peers’ through FY16-FY17. In FY17, the bank increased its focus on cash recovery and upgrades (FY17: INR136.6 billion). Ind-Ra expects the bank to keep focussing on cash recovery, considering the bleak profitability situation through FY18 and rising stock of recognised stress assets. At FYE17, PNB’s recovery efforts yielded results to support its overall profitability. 


RATING SENSITIVITIES

Negative: PNB’s Basel III Tier 2 bond rating has been equated to its Long-Term Issuer Rating which is at its support floor and could change if there is a change in the government’s support stance or ownership. However, the rating of AT1 bonds is linked to PNB’s standalone profile, and there could be a negative rating action if the bank experiences significant (more than expected) deterioration in the asset quality, leading to higher than expected deterioration in the profitability in the short term impairing its ability to add meaningful capital through internal accruals.  Demonstration of banks’ ability to shore up capital in the short term to neutralise the impact of significant provisioning requirement would also be a key rating monitorable.


COMPANY PROFILE

PNB had a branch network of 6,937 branches and 10,681 ATMs as of March 2017. At end-FY17, the bank had a savings account market share of around 6.8%.


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating/Outlook

23 March 2017

2 February 2016

9 April 2014

Issuer rating

Long term

-

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

Issuer rating

Short term

-

IND A1+

IND A1+

IND A1+

IND A1+

Basel III Tier 2 bonds

Long term

INR30

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

IND AAA

AT1 bonds PNB-PDI-I

Long term

INR67.5

IND AA+/Negative

IND AA+/Stable

IND AA+/Stable

-

Senior infrastructure bonds

Long term

INR20

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

-

ANNEXURE

Instrument

 

ISIN

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Basel III AT1 bonds Series VII

 

INE160A08076

13 February  2015

9.15

Perpetual

INR15

IND AA+/Negative

Affirmed

Basel III AT1 bonds Series VIII

 

INE160A08100

3 March 2017

8.95 (Semi-annual)

Perpetual

INR15

IND AA+/Negative

Affirmed

Basel III AT1 bonds Series IX

 

INE160A08118

29 March 2017

9.21

Perpetual

INR5

IND AA+/Negative

Affirmed

Basel III AT1 bonds Series X

 

INE160A08126

31 March 2017

9.21

Perpetual

INR2.5

IND AA+/Negative

Affirmed

Basel III Tier 2 bonds Series XVII

INE160A08043

9 September 2014

9.35

9 September 2024

INR5

IND AAA/Stable

Affirmed

Basel III Tier 2 bonds Series XVIII

INE160A08050

30 September 2014

9.25

30 September 2024

INR10

IND AAA/Stable

Affirmed

Basel III Tier 2 bonds Series XIX

INE160A08092

5 February 2016

8.65

5 February 2026

INR15

IND AAA/Stable

Affirmed


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

ABOUT INDIA RATINGS AND RESEARCH

India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies, structured finance and project finance companies. 

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Analyst Names

  • Primary Analyst

    Udit Kariwala

    Associate Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th Floor, West Wing, Bandra Kurla Complex, Bandra East,Mumbai - 400051
    +91 22 40001749

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121