Moody's downgrades deposit ratings, credit assessment of four PSU banks

Says economic shock from Covid-19 may weaken borrower credit profiles and hurt their asset quality. outlook on ratings of all four is negative

Global rating agency Moody’s downgraded the long-term local and foreign currency deposit ratings of four public sector banks — Bank of Baroda, Bank of India, Canara Bank, and Union Bank of India — from “Baa3” to “Ba1”.

It also downgraded Baseline Credit Assessments (BCAs) from “Ba3” to “b1” for these four PSBs as the economic shock from the Covid-19 pandemic might weaken borrower credit profiles and hurt the banks’ asset quality. The outlook on the ratings of the four banks is negative.

Meanwhile, Moody’s affirmed Punjab National Bank’s long-term local and foreign currency deposit ratings at “Ba1” and its BCA at “b1”. PNB’s ratings outlook was changed to negative from stable, Moody’s said in a statement. The actions conclude the review for downgrade initiated on June 2.

Prolonged financial stress among households, weak job creation and a credit crunch among non-banking financial companies will lead to a rise in non-performing loans. This might delay the ongoing clean-up of banks’ balance sheets.

The BCA downgrades take into consideration rising risks to the banks’ asset quality because of the severe economic contraction, which will result in an increase in credit costs. That will hurt profitability and strain the banks’ modest capitalisation, reversing recent improvements. Funding and liquidity continue to be key strengths.

Moody’s assumed a very high probability of support from the central government in times of need. It also factored in the banks’ deposit market shares and their linkages with the government, including through ownership.

Referring to the affirmation of PNB’s rating, Moody’s said deteriorating asset quality and profitability will weigh on its capitalisation. However, PNB’s financial metrics were improving before the 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.