Detailed Rationale

CRISIL Ratings has upgraded its ratings on the Tier II Bonds (under Basel III), Lower Tier II Bonds (under Basel II), Upper Tier II Bonds (under Basel II), Perpetual Tier I Bonds (under Basel II) and Infrastructure Bonds of Punjab National Bank (PNB) to ‘CRISIL AAA/Stable’ from ‘CRISIL AA+/Positive’ and on Tier I Bonds (under Basel III) to ‘CRISIL AA+/Stable’ from ‘CRISIL AA/Positive’. The rating on the Certificate of Deposits has been reaffirmed at ‘CRISIL A1+’.

 

CRISIL Ratings has also withdrawn its rating on Tier II bonds (under BASEL III) of Rs 500 crore (See Annexure 'Details of Rating Withdrawn' for details) in line with its withdrawal policy. CRISIL Ratings has received independent confirmation that these instruments have been fully redeemed.

 

The upgrade in the long-term ratings factors in consistent improvement in the bank’s underlying asset quality reflected by limited slippages, higher recoveries and consequently lower gross non-performing assets (GNPA). This was driven by conscious measures undertaken by the bank to refine its underwriting and recovery mechanisms; amidst multiple challenges faced by it in the past including large legacy accounts, branch integration post-merger of other banks into it and thereafter pandemic’s impact on the economy. The bank’s GNPA ratio has improved to 7.0% as on September 30, 2023 (8.7% as on March 31, 2023 and 11.8% as on March 31, 2022) from a peak of 18.4% as on March 31, 2018, primarily stemming from corporate book recoveries. Annualized slippage ratio (as defined by additions to NPA as a proportion of opening gross advances) improved to 0.8% for first half of fiscal 2024 (H1 FY24) as compared to 2.0% for FY23 and 3.3% for FY22. With the bank aiming at maintaining healthy provision buffers, the Net NPA ratio too has improved to its decadal low at 1.5% as on September 30, 2023 (2.7% as on March 31, 2023, 4.8% as on March 31, 2022). Despite subdued profitability in the past, the earnings profile has been on an improving trajectory since last 6 quarters as the bank reported annualized Return on Assets (RoA) of 0.47% and 0.34% for the first and second quarters of fiscal 2024 (as compared to 0.32%, 0.18%, 0.12% and 0.09% for Q4, Q3, Q2 and Q1 of fiscal 2023).

 

With a healthy provision coverage ratio (PCR) excluding technical write-offs at 80.0% as on September 30, 2023, the incremental credit costs are expected to be limited, supporting the gradual improvement in the profitability. However, the bank’s ability to contain slippages, manage overall asset quality and sustainably improve its overall earnings profile (even as the bank transitions to ECL framework) would remain a key monitorable.

 

The outstanding ratings on the debt instruments of PNB continue to factor in the expectation of strong support from the majority owner, Government of India (GoI), established market position and the bank’s healthy resource profile.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has factored in the support the bank is expected to receive from GoI. This is because GoI is both the majority shareholder in PSBs and the guardian of India's financial system. The stability of the banking sector is of prime importance to GoI, given the criticality of the sector to the economy, the strong public perception of government backing for PSBs, and the severe implications of any PSB failure in terms of political fallout, systemic stability, and investor confidence in public sector institutions.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation

Key Rating Drivers & Detailed Description

Strengths:

Strong expectation of support from the GoI

The ratings continue to factor in the expectation of strong government support, both on an ongoing basis and in the event of any distress. This is because GoI is both the majority shareholder in PSBs, and the guardian of India's financial system. Stability of the banking sector is of prime importance to GoI, given the criticality of the sector to the economy, strong public perception of sovereign backing for PSBs, and severe implications of any PSB failure, in terms of political fallout, systemic stability, and investor confidence in public sector institutions. CRISIL Ratings believes the majority ownership creates a moral obligation on GoI to support PSBs, including PNB. As part of the ‘Indradhanush’ framework, the government had pledged to infuse at least Rs 70,000 crore in PSBs, over fiscals 2015 to 2019, of which Rs 25,000 crore was infused in both fiscals 2016 and 2017. Further, in October 2017, the government had outlined a recapitalisation package of Rs 2.11 lakh crore over fiscals 2018 and 2019; PNB, erstwhile Oriental Bank of Commerce (OBC) and erstwhile United Bank of India (UBI) received aggregate Rs 11,678 crore in fiscal 2018 and Rs 25,839 crore in fiscal 2019. Also, on August 30, 2019, GoI had announced its plan to merge 10 PSBs into four along with its plan for first round of capital infusion of Rs 55,250 crore for fiscal 2020 out of which PNB and erstwhile UBI received Rs 16,091 crore and Rs 1,666 crore respectively. Thus, over the past four fiscals, GoI infused around Rs 55,724 crore into the combined entity. During the first half of fiscal 2022, the bank raised Rs 1800 crore via QIP. CRISIL Ratings believes that GoI will continue to provide distress support to all PSBs and will not allow any of them to fail; it will also support them to meet Basel III capital regulations.

 

Adequate capitalisation

PNB remains adequately capitalized with Tier I and overall CAR (under Basel III) at 12.0% and 15.1% respectively as on September 30, 2023 (12.7% and 15.5% respectively as on March 31, 2023). The bank’s networth coverage for net NPA improved to 7.8 times as on September 30, 2023 (4.4 times as on March 31, 2023, 2.7 times as on March 31, 2021). Capitalisation has been supported by regular infusion from GoI. CRISIL Ratings believes that PNB will be able to maintain adequate capitalisation over the medium term, backed by capital support from GoI. 

 

The recent regulation by RBI on revised risk weights on unsecured consumer loans, including credit card receivables and loans to NBFCs beyond a specific threshold is expected to have an impact on the capital ratios of the bank. However, the capitalisation levels would remain comfortable. 

 

Established market position: 

PNB has a strong presence in the Indian banking system with market share of ~6.3% of the system’s advances at Rs 9,41,721 crore as on September 30, 2023. It is the second largest public sector bank in India in terms of total assets (Rs 14,97,100 crore as on September 30, 2023). Its total deposits stood at Rs 13,09,910 crore as on September 30, 2023.The bank has pan-India presence through a network of 10,092 branches as on September 30, 2023. The Bank also has increased its share of retail, agriculture and MSME advances to 55.6% of gross domestic advances as on September 30, 2023 (51.2% as on March 31, 2022) driven by faster growth in the retail book.

 

Healthy resource profile: 

The resource profile of the bank remains healthy. The bank had a large and geographically diversified deposit base which grew by 9.75% Y-o-Y to Rs 13,09,910 crore as on September 30, 2023 driven by growth in term deposits. The domestic CASA ratio declined to 42.1% as on September 30, 2023 (43.0% as on March 31, 2023, 47.43% as on March 31, 2022). Moreover, retail term deposits (with size less than Rs 2 crore) and savings deposits comprised around 78% of total deposits as on March 31, 2023. The cost of deposit rose to 4.8% for H1 FY24 (4.1% for fiscal 2023, 4.0% for fiscal 2022). Overall, CRISIL Ratings believes that the bank will maintain a healthy resource profile over the medium term.

 

Weakness:

Modest asset quality, albeit on improving trend:

The asset quality of the bank has shown continuous improvement with GNPA at 7.0% as on September 30, 2023 down from 8.7% as on March 31, 2023 (11.8% as on March 31, 2022) driven by increased recoveries and lower incremental slippages.

 

The incremental slippages for the bank remain limited and have exhibited an improving trend with annualized slippage ratio at 0.8% for H1 FY24 as compared to 2.0% for fiscal 2023 and 3.3% for fiscal 2022. On a quarterly basis also, the slippages have shown a continued improving trajectory. The recoveries are stemming primarily from the corporate book, thereby resulting in improved GNPA ratio for the corporate book at 3.0% as on September 30, 2023 (from 5.0% as on March 31, 2023 and 8.5% as on March 31, 2022). The GNPA ratios for the Agriculture and MSME segments stood at 16.3% each as on September 30, 2023 (18.3% and 18.9% respectively as on March 31, 2023).

 

The overall SMA-1 and SMA-2 accounts as a proportion of gross advances stood at 2.2% as on September 30, 2023 (2.1% as on March 31, 2023, 4.5% as on March 31, 2022). Under the RBI’s resolution framework 1.0 and RBI’s resolution framework 2.0 announced by the RBI, the standard restructured book accounted for <1% of gross advances as on September 30, 2023.

 

Furthermore, since bank has been conservatively focusing on enhancing its provision coverage, the Net NPA considerably improved to 1.5% as on September 30, 2023 from 2.7% as on March 31, 2023 (4.8% as on March 31, 2022).

 

CRISIL Ratings expects the trajectory of improving asset quality metrics to continue going forward. The bank’s ability to improve its collections especially in the Agriculture and MSME segments, contain the slippages at current levels and thereby improve the overall asset quality remains a key rating monitorable.

 

Average, albeit improving, profitability:

Primarily as a result of the elevated asset quality metrics, PNB’s earnings profile has been constrained over the last few years because of high provisioning costs. The bank has steadily increased its overall provisioning and the provision coverage ratio (PCR) excluding technical write-off to 80.0% as on September 30, 2023 from the levels of 70.8% as on March 31, 2023 and 62.2% as on March 31, 2022.

 

Total income (net of interest expense) to total assets ratio improved a tad to 3.5% annualised for H1 FY24 from 3.4% in fiscal 2023 and 3.2% in fiscal 2022. This was however offset by higher OPEX ratio which increased to 1.9% in H1 FY24 from 1.7% in fiscal 2023 and 1.6% in fiscal 2023, owing to initiatives taken for digital and HR transformation as well as wage revision impact. The credit costs improved to 1.0% in H1 FY24 from 1.3% in fiscal 2023 (1.3% in fiscal 2022). Thus, with steady pre-provisioning profits and lower credit costs, the bank reported profit after tax of Rs 3,102 crore for H1 FY24, already higher than Rs 2,507 crore for fiscal 2023 (FY22: Rs 3,457 crore) translating into an RoA of 0.41% for H1 FY24 (FY23: 0.18%, FY22: 0.27%).

 

However, the bank’s ability to sustainably improve its overall earnings profile (even as the bank transitions to ECL framework) would remain a key monitorable.

Liquidity: Superior

Liquidity is comfortable, supported by a strong retail deposit base. Liquidity coverage ratio (based on simple average for daily observations) stood at 162.3% as on March 31, 2023, against the regulatory requirement of 100%. The bank also has access to systemic sources of funds, such as the liquidity adjustment facility from Reserve Bank of India, access to the call money market, and refinance limits from sources such as the National Housing Bank and the National Bank for Agriculture and Rural Development.

 

ESG profile

CRISIL Ratings believes that PNB’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

The ESG profile for financial sector entities typically factors in governance as a key differentiator between them. The sector has reasonable social impact because of its substantial employee and customer base and can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, the lending decisions may have a bearing on the environment.

 

PNB has an ongoing focus on strengthening various aspects of its ESG profile.

 

PNB’s key ESG highlights:

• As a policy, the Bank restricts extending finance for setting up new units producing / consuming Ozone Depleting Substances (ODS) and does not advocate financial assistance to small / medium scale units engaged in the manufacturing of aerosol units using Chlorofluorocarbons (CFC), thus enabling reduction in greenhouse effect.
• For promoting green economy, the bank has introduced various financing schemes like PNB Solar Energy Scheme, scheme for financing e-rickshaws, scheme for financing setting up of bio-gas units, solar power project financing, scheme for financing Green houses, soil conservation, and schemes for installation of solar water pumping system.
• The bank has introduced products like PNB Green Car loan (purchase of new electronic car for personal use), financing of solar power systems under Housing Loan scheme (installation of rooftop solar system at residential house) and PNB Green ride (to assist operators of e-rickshaws).
• Of the total workforce, around 24% comprised of women as on March 31, 2023. Further, the bank has taken initiatives to promote gender equity within the organization. 
• 42% of the board members are independent directors, and none of them have tenure exceeding 10 years.  The bank also has a dedicated investor grievance redressal mechanism.
• ESG disclosures of the bank are evolving; and it is in the process of further strengthening the disclosures going forward.
• There is growing importance of ESG among investors and lenders. PNB’s commitment to ESG will play a key role in enhancing stakeholder confidence, given shareholding by foreign portfolio investors and access to both domestic and foreign capital markets.

Outlook: Stable

CRISIL Ratings believes PNB will maintain its strong market position in the financial services sector in India and will continue to benefit from strong support from GoI,

Rating Sensitivity factors

Downward factors

• Material change in shareholding and/or expectation of support from GoI
• Substantial deterioration in the asset quality metrics from its current levels, thereby also impacting earnings profile
• Decline in capital adequacy ratios below minimum regulatory requirements (including capital conservation buffer, which is Tier I of 9.5% and overall CAR of 11.5%) for an extended period
• Significant deterioration in the eligible reserves available with the bank (for Tier-I bonds under Basel III)
• Downward revision in Tier-II bonds will result in corresponding change in rating of Tier-I bonds (under Basel III).

About the Bank

PNB, established in 1895 in Lahore, Pakistan, expanded its operations through mergers and acquisitions before being nationalised in 1969. On March 4, 2020, the Union Cabinet approved the amalgamation of PNB, UBI and OBC, and the merger got effective from April 1, 2020. The GoI owned 73.15% of the bank as on March 31, 2023.

Any other information:

Note on Tier-I Instruments (under Basel III)

The distinguishing features of non-equity Tier-I capital instruments (under Basel III) are the existence of coupon discretion at all times, high capital thresholds for likely coupon non-payment, and principal write-down (on breach of a pre-specified trigger). These features increase risk attributes of non-equity Tier-I instruments over those of Tier-II instruments under Basel III, and capital instruments under Basel II. To factor in these risks, CRISIL Ratings notches down the rating on these instruments from the bank's corporate credit rating. The rating on PNB’s Tier-I bonds (under Basel III) has, therefore, been lowered by two notches from its corporate credit rating to 'CRISIL AA-, in line with CRISIL's criteria (refer to 'CRISIL's rating criteria for BASEL III compliant instruments of banks').

The factors that could trigger a default event for non-equity Tier-I capital instruments (under Basel III) resulting in non-payment of coupon are: i) the bank exercising coupon discretion; ii) inadequacy of eligible reserves to honour coupon payment if the bank reports losses or low profits; or iii) the bank breaching the minimum regulatory Common Equity Tier-I ratio. Moreover, given the additional risk attributes, the rating transition for non-equity Tier-I capital instruments (under Basel III) can potentially be higher and faster than that for Tier-II instruments.

 

CRISIL's rating on the Tier I bonds (under Basel III) of PNB is as per the criteria 'CRISIL's rating criteria for BASEL III-compliant instruments of banks'. CRISIL Ratings evaluates the bank's (i) reserves position (adjusted for any medium-term stress in profitability) and (ii) cushion over regulatory minimum CET1 (including CCB) capital ratios. Also evaluated is the demonstrated track record and management philosophy regarding maintaining sufficient CET1 capital cushion above the minimum regulatory requirements. Post the completion of the merger with OBC and UBI, the merged PNB reported huge losses. Subsequently, on August 4, 2020, the bank has taken shareholder approval for utilisation of share premium account for the purpose of setting off accumulated losses. This has supported the eligible reserves which post the adjustment stood at around Rs 26515 crores as on June 30, 2020. Consequently, the eligible reserves to total asset ratio was adequateat 2.2%.  A material reduction in this cushion would be a rating sensitivity factor for Tier I bonds.

 

Note on Tier-II Instruments (under Basel III)

The distinguishing feature of Tier-II capital instruments under Basel II, is the existence of the point of non-viability (PONV) trigger, occurrence of which may result in loss of principal to the investors, and hence, to default on the instrument by the issuer. According to the Basel III guidelines, the PONV trigger will be determined by the RBI. CRISIL Ratings believes that the PONV trigger is a remote possibility in the Indian context, given the robust regulatory and supervisory framework and the systemic importance of the banking sector. The inherent risk associated with the PONV feature is adequately factored into the rating on the instrument.

 

Note on Hybrid Instruments (under Basel II)

Given that hybrid capital instruments (tier-I perpetual bonds and upper tier-II bonds; under Basel II) have characteristics that set them apart from lower tier-II bonds (under Basel II), the ratings on the two instruments may not necessarily be identical. The factors that could trigger a default event for hybrid instruments include: the bank breaching the regulatory minimum capital requirement, or the regulator’s denial of permission to the bank to make payments of interest and principal if the bank reports losses. Hence, the transition from one rating category to another may be significantly sharper for these instruments than in the case of Lower Tier-II bonds; this is because debt servicing on hybrid instruments is far more sensitive to the bank’s overall capital adequacy levels and profitability