Moody's revises outlook for three Indian public sector banks to stable from negative

Moody's Investors Service has affirmed the Baa3/P-3 local and foreign currency bank deposit ratings of three Indian public sector banks. The affected banks are: (1) Bank of India (BOI), (2) Union Bank of India (Union Bank), and (3) Oriental Bank of Commerce (OBC).

For BOI, Moody's has affirmed the senior unsecured MTN program rating at (P)Baa3 and the senior unsecured debt rating at Baa3 for debt issued from its London and Jersey branch.

Similarly, for Union Bank, Moody's has affirmed the senior unsecured MTN program rating at (P)Baa3 and the senior unsecured debt rating at Baa3 for debt issued from Union Bank's Hong Kong Branch.

Moody's has also affirmed the standalone credit profiles or baseline credit assessments (BCA) of these three banks at ba3. As a result, Moody's has affirmed the subordinate MTN program rating at (P)Ba3 for BOI and its London and Jersey branch, and Union Bank and its Hong Kong branch.

In the case of BOI, Moody's has affirmed the bank's preferred stock non-cumulative rating at B3(hyb). And, for Union Bank and its Hong Kong branch, Moody's has affirmed the junior subordinate MTN program rating at (P)B1.

The counterparty risk assessment (CRA) of the three banks is affirmed at Baa3(cr)/P-3(cr).

At the same time, Moody's changed the outlook to stable from negative for BOI and its London and Jersey branch, Union Bank and its Hong Kong branch, and OBC.

The list of affected ratings is provided at the end of this press release.

RATINGS RATIONALE

ANNOUNCEMENT OF THE GOVERNMENT'S CAPITAL INFUSION PLAN IS THE KEY DRIVER OF THE CHANGE IN OUTLOOK

On 24 October 2017, the Government of India (Baa3 positive) announced a INR2.1 trillion ($32.0 billion) recapitalization plan for Indian public sector banks.

The quantum of the plan is large enough to help improve the capitalization levels of the banks. Of the total, INR1.5 trillion ($23.5 billion) would be in the form of recapitalization (recap) bonds and already announced budgetary support. The government expects the banks to raise INR580.0 billion ($8.9 billion) from the capital markets.

Given that the overarching credit weakness of the public sector banks is currently their weak capitalization levels, Moody's sees the announced capital infusion plan as a credit positive for the banks.

While details of the capital allocation plan, including the structure of the recap bonds and allocations to individual banks, have not yet been disclosed, Moody's expects that the INR1.5 trillion will be sufficient for all public sector banks to maintain some buffer over the minimum Basel III common equity tier 1 (CET1) ratio of 8% by fiscal March 2019. This estimate factors in moderate loan growth of about 10% over the next two fiscal years and an improvement in the provisioning coverage ratio.

Furthermore, the additional capital will help the banks take accelerated provisioning for their problem assets, which will in turn improve their capacity to take haircuts on those assets in a resolution process. In addition, as their credit profiles improve, Moody's expects that some banks will be able to raise capital from the equity markets, which will further support their capitalization profiles.

GOVERNMENT CAPITAL INFUSION PLAN ALLEVIATES DOWNSIDE RISKS TO THE BANKS' BCAs

The revision in the outlooks for BOI's, Union Bank's, and OBC's ratings to stable from negative, reflect Moody's view that the government's capital infusion plan alleviates some of the downside risks to their BCAs and ratings.

Prior to this rating action, the BCAs of these three banks were under pressure due to the deterioration in their asset quality, as well as Moody's expectation of pressure on their profitability, as they continued to build loan loss buffers. Furthermore, their capitalization profile is somewhat weaker than other rated banks in India, and the ability to generate internal capital is limited.

As such, the capital infusion plan which is significantly higher than what was originally budgeted will mitigate some downside risks. Moreover, their funding and liquidity levels remain stable and support their overall financial profiles.

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