Moody's cracks down on five Indian public sector banks

Singapore, Sep 4 : Moody's Investors Service on Friday downgraded various instruments of five Indian banks: Bank of Baroda, Bank of India, Canara Bank, Punjab National Bank and Union Bank of India.
Moody's has downgraded the long-term local and foreign currency deposit ratings of BOB, BOI, Canara and UBI to Ba1 from Baa3 and their baseline credit assessments (BCAs) to b1 from ba3. The outlook on the ratings of the four banks is negative.
At the same time, Moody's has affirmed PNB's long-term local and foreign currency deposit ratings at Ba1 and its BCA at b1. PNB's ratings outlook is changed to negative from stable.
The economic shock from coronavirus pandemic is exacerbating an already material slowdown in India's economic growth, weakening borrowers' credit profiles and hurting Indian banks' asset quality.
Prolonged financial stress among households, weak job creation and a credit crunch among non-bank financial companies will lead to a rise in non-performing loans, delaying the ongoing clean-up of banks' balance sheets, said Moody's.
The BCA downgrades take into consideration rising risks to the banks' asset quality as a result of the severe economic contraction which will result in an increase in credit costs.
This increase in credit costs will hurt profitability and also strain the banks' modest capitalisation, reversing recent improvements. Funding and liquidity continue to be key credit strengths given their status as public sector banks which results in good deposit franchises.
The banks' Ba1 long-term local and foreign currency deposit ratings incorporate three-notches of uplift from their b1 BCAs to reflect Moody's assumption of a very high probability of support from the government in times of need.
Moody's assumption takes into account the banks' deposit market shares as well as their linkages with the government including by way of ownership. "But the negative outlook factors in further downside risks to the banks' financial profiles because of India's uncertain operating environment."
A downgrade of the banks' BCAs will lead to a downgrade of their ratings. Moody's will downgrade the banks' BCAs if the rating agency expects their solvency to deteriorate further because of an increase in problem loans coupled with significant declines in earnings which will weaken their capitalisation.
Any indication of diminishing government support for the banks will also lead to a downgrade of their ratings, it added.