Moody's cuts outlook to negative for 3 PSU banks

The rating agency cuts ratings of PNB, BoB and Canara Bank on concerns over worsening asset quality

Rating agency Moody’s today revised the rating outlook to negative from stable for three public sector banks due to worsening asset quality which is exerting pressure on their profitability and capital. These three banks – Punjab National Bank, Bank of Baroda and Canara Bank has witnessed increase in stress with both gross non-performing asset and restructured loan portfolio rising.

"The revision in rating outlook reflects the increased risk posed by current trends in asset quality, with continuing rise in gross non-performing loans and restructured loans pressuring profits and capital," Moody’s said.

According to the rating agency, these banks are particularly challenged by the prevailing operating environment, characterised by high inflation and high interest rates.

Headline inflation, measured by the wholesale price index, is hovering around the double-digit mark for the last three years which has forced the Reserve Bank of India hiking interest rates 13 times between March 2010 and October 2011. The central bank had reduced the policy rate 50 basis point in April but decided to maintain status quo since then as inflation stayed much above the medium term comfort zone of RBI which is around 5%.

Public sector banks have felt the asset quality pressure much more than their private sector peers. As asset quality pressure mounted, most public sector banks have lowered the provision coverage ratio in the last one year.

According to Moody’s, high inflation and interest rates are leading to the economic slowdown and reducing the repayment ability of some corporate borrowers.

Moody’s said, given the negative outlook, deposit ratings and supported debt ratings, are unlikely to go up in the next 12-18 months.

The rating agency also said the individual bank's standalone rating could come under pressure if the asset quality, which is determined by gross NPAs and restructured and low provisioning cover, continues to deteriorate to a point where gross NPAs as a percentage of shareholders capital and loan loss reserves increase to over 35% and/or if pre-provision income as a percentage of year-end average risk weighted assets falls below 2.75%.