Rating Rationale
October 23, 2020 | Mumbai
PNB Gilts Limited
Rating Reaffirmed
 
Rating Action
Rs.1000 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A1+' rating on the commercial paper programme of PNB Gilts Limited (PNB Gilts).
 
The rating on PNB Gilts reflects CRISIL's expectation of strong support from the parent, Punjab National Bank (PNB; rated CRISIL AA+/CRISIL AA-*/Stable). The rating also factors in healthy capitalisation and strong liquidity. These rating strengths are partially offset by volatility in earnings because of interest rate movements, and lack of diversity in revenue.

Analytical Approach

For arriving at the ratings, CRISIL has assessed the standalone credit risk profile of PNB Gilts and continues to factor in strong managerial and financial support from the parent PNB.
 
CRISIL believes PNB Gilts, will, in case of exigencies, receive distress support from its parent for timely repayment of debt obligations, considering the strategic importance of the entity and also high moral obligation on account of majority shareholding and shared brand name.

Key Rating Drivers & Detailed Description
Strengths:
* Expectation of strong managerial and financial support from the parent
PNB, which is India's second-largest public sector bank in terms of assets (Rs 12.3 lakh crore as on June 30, 2020), holds a majority stake (74.07%) in PNB Gilts. The latter's board of directors comprises senior personnel of PNB; the chairman and managing director, and the executive director of PNB are on the board of PNB Gilts. PNB has demonstrated its willingness to support the subsidiary. Moreover, a shared brand name and PNB Gilts' status as a subsidiary of PNB, imply that a default by PNB Gilts will have adverse repercussions on the parent. In CRISIL's opinion, these factors reflect PNB's strong moral obligation to support PNB Gilts in the event of distress.
 
* Healthy capitalisation
PNB Gilts is among the largest standalone primary dealerships in India, with a reported networth of Rs 1327 crore as on June 30, 2020 (Rs 1043 crore as on March 31, 2020; Rs 888 crore as on March 31, 2019). Capital adequacy ratio was also comfortable at 26.47% as on June 30, 2020 (32.47% as on March 31, 2020; 36.58% as on March 31, 2019). Large net worth enhances the ability to withstand high interest rate volatility. Average and minimum net worth coverage for 100 bps shock in interest rates stood at 2.6 and 1.4 times, respectively, for fiscal 2020 (vis-a-vis 4.8 and 2.0 times, respectively, for fiscal 2019).
 
* Strong liquidity
As a primary dealer, PNB Gilts deals in liquid securities, with government securities (G-Secs), state development loans and treasury bills, constituting over 90% of its total portfolio. Trading is permitted only in bonds rated 'AA+' or 'AAA', while investments in central PSUs is allowed in bonds rated 'AA'. Liquidity is further supported by access to the collateralised borrowing and lending obligations, repurchase of securities, and call money markets, and the Reserve Bank of India's (RBI) refinance and liquidity adjustment facilities.
 
Weaknesses:
* Volatility in earnings because of interest rate movements
Being a primary dealer, PNB Gilts' financial risk profile remains vulnerable to market risks, emanating from interest rate movements. As underwriting and trading of G-Secs constitute its mainstay business, rising interest rates may adversely affect the volume and income.
 
* Lack of diversity in revenue streams
Revenue profile continues to be highly dependent on income from the core primary dealer (PD) business. Fee-based income constituted only ~2% of total income in fiscal 2020, with the remainder coming from core PD activities. This limits the financial flexibility to cushion profitability in times of lower volume in the debt market.
Liquidity Strong

Given the inherent liquidity available in the PD business, the liquidity position of the company remains strong. The company's liquidity is cushioned by line of credit of Rs 1000 crore available from the parent, PNB. Also, the company has access to refinance limit available from RBI under liquidity support facility, the maximum credit limit available under this scheme was Rs 785 crore as on September 30, 2020.

Rating Sensitivity Factors
Downward factors
* Decline in PNB shareholding below 50% and/or diminution of support philosophy of PNB
* Deterioration in profitability, over an extended period, thereby also impacting capitalisation.

About the Company

PNB Gilts was incorporated in 1996, as a wholly-owned subsidiary of PNB. Following a public issue in July 2000, PNB's stake in the subsidiary declined to 74.07%. PNB Gilts primarily trades in debt and money market instruments.
 
For fiscal 2020, PNB Gilts reported profit after tax (PAT; as per Ind-AS) of Rs 186 crore on a total income of Rs 883 crore as against a PAT of Rs 53 crore on a total income of Rs 508 crore in the previous fiscal. For the quarter ended June 30, 2020, the company reported a PAT of Rs 284 crore on a total income of Rs 492 crore as against a PAT of Rs 45 crore on a total income of Rs 194 crore.

* For Tier 1 bonds (under  Basel III)

Key Financial Indicators
As on / for the period ended June 30 Unit 2020 2019
Total assets Rs crore 16191 9792
Total income Rs crore 492 194
Profit after tax Rs crore 284 45
Adjusted gearing Times 11.2 9.5

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs crore) Complexity Levels Rating assigned with outlook
NA Commercial paper programme NA NA 7-365 days 1000 Simple CRISIL A1+
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  1000.00  CRISIL A1+  17-06-20  CRISIL A1+  24-12-19  CRISIL A1+  20-12-18  CRISIL A1+  13-11-17  CRISIL A1+  -- 
        30-01-20  CRISIL A1+      19-02-18  CRISIL A1+       
Short Term Debt  ST                  23-03-17  CRISIL A1+  CRISIL A1+ 
All amounts are in Rs.Cr.
Links to related criteria
Rating Criteria for Securities Companies
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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