In its latest rating action, Moody's has downgraded the long-term local and foreign currency deposit ratings of BOB, BOI, Canara and Union Bank to Ba1 from Baa3 and their Baseline Credit Assessments (BCAs) to b1 from ba3.
Further, the rating agency has given a negative outlook in these four above-mentioned banks.
Explaining the rationale for rating downgrade of the four banks, Moody's said, 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 capitalization, 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."
On the negative outlook, Moody's said, "The negative outlook factors in further downside risks to the banks' financial profiles because of India's uncertain operating environment."
However, Moody's has affirmed PNB's long-term local and foreign currency deposit ratings at Ba1 and its BCA at b1. Notably, Moody's has revised the outlook on PNB to 'Stable' from 'Negative'.
For PNB, the rating agency said, "The affirmation of PNB's Ba1 long-term local and foreign currency deposit ratings, which incorporates a three-notch uplift for government support from its b1 BCA, reflects Moody's expectation that deteriorating asset quality and profitability will weigh on its capitalization. However, PNB's financial metrics had been improving prior to the economic slowdown, which combined with the bank's good funding and liquidity mitigates the negative impact on its credit profile of deteriorating asset quality and profitability. The three-notch uplift for government support reflects PNB's deposit market share as well as its linkages with the government."
Due to negative outlook, Moody's said the ratings of BOB, Canara, PNB and UBI are unlikely to be upgraded in the next 12-18 months. Nevertheless, the rating outlooks could be changed to stable if macroeconomic conditions in India improve or if there are improvements in the banks' standalone credit strength, including strengthening capitalization or a less severe deterioration in asset quality than currently expected.