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Moody’s cracks down on five public sector banks


SINGAPORE: Moody’s Investors Service downgraded several instruments from five Indian banks on Friday: Bank of Baroda (BOB), Bank of India (BOI), Canara Bank, Punjab National Bank and Union Bank of India.
Moody’s has downgraded BOB, BOI, Canara and UBI long-term local and foreign currency deposit ratings to Ba1 from Baa3 and its benchmark credit assessments (BCA) to b1 from ba3. The outlook for the ratings of the four banks is negative.
At the same time, Moody’s affirmed PNB’s long-term local and foreign currency deposit ratings at Ba1 and its BCA at b1. The outlook on PNB’s ratings changes from stable to negative.
The economic impact of the coronavirus pandemic is exacerbating an already significant slowdown in India’s economic growth, weakening the credit profiles of borrowers, and hurting the asset quality of Indian banks.
Prolonged financial stress among households, weak job creation and the credit crunch among non-bank finance companies will lead to a surge in non-performing loans, delaying the ongoing cleanup of bank balance sheets, Moody’s said.
The BCA downgrades take into account the increasing risks to the banks’ asset quality as a result of the severe economic contraction that will result in an increase in credit costs.
This increase in borrowing costs will affect profitability and will also affect the banks’ modest capitalization, reversing recent improvements. Financing and liquidity continue to be key credit strengths given their status as public sector banks, which translates into good deposit franchises.
Banks’ Ba1 long-term foreign and local currency deposit ratings incorporate three levels of improvement to their BCAs from b1 to reflect Moody’s assumption of a very high probability of government support in times of need.
Moody’s assumption takes into account the banks’ deposit market shares as well as their ties to the government, including through ownership. “But the negative outlook influences further downside risks to banks’ financial profiles due to the uncertain operating environment in India.”
A downgrade of banks’ BCAs will lead to a downgrade of their ratings. Moody’s will downgrade banks’ BCAs if the rating agency expects their creditworthiness to deteriorate further due to an increase in problem loans coupled with a significant decrease in earnings that will weaken their capitalization.
Any sign of a decline in government support for banks will also lead to a downgrade of their ratings, he added.

Times of India