Moody's takes rating action on five Indian public sector banks following merger announcement

Moody's Investors Service on Wednesday took rating actions on Canara Bank, Oriental Bank of Commerce (OBC), Punjab National Bank (PNB), Syndicate Bank and Union Bank of India (Union Bank) that will undergo mergers as announced by the government.

Specifically, Moody's has affirmed the local and foreign currency deposit ratings of Canara Bank, OBC, Syndicate Bank and Union Bank at Baa3/P-3. Moody's has also affirmed their baseline credit assessments (BCAs) and adjusted BCAs at ba3.

Moody's has also affirmed the local and foreign currency deposit ratings of PNB at Ba1/NP, and affirmed the bank's BCA and adjusted BCA at b1. The outlooks on Canara Bank, OBC, Syndicate Bank and Union Bank are maintained at stable.

Moody's has also changed the outlook on PNB to positive from stable. "The affirmation of PNB's ratings with a positive outlook reflects our view that the bank's BCA will likely improve after the capital infusion from the government, and that its financial metrics will gradually improve," it said in a statement.

Post-merger, PNB will become the second largest public sector bank in India with a deposit market share of 8 per cent as compared to its standalone market share of 5.2 per cent as of March 2019.

Taking into account the reported financials of PNB, OBC and United Bank, Moody's expects the merged entity's consolidated CET1 ratio will exceed 10 per cent compared to a standalone ratio of 6.3 per cent as of June 2019. The CET1 ratio calculation takes into account the Rs 17,600 crore capital infusions into PNB Bank and United Bank.

Moody's expects the bank's asset quality and profitability will remain broadly unchanged following the merger. However, the bank's enlarged market share will benefit its deposit franchise and help improve its funding.