Punjab National Bank 'CRISIL AAA/Stable' assigned to Infrastructure Bonds; Perpetual Tier-I Bonds (under Basel II), Lower Tier-II Bonds (under Basel II), Upper Tier-II Bonds (under Basel II) Withdrawn
Rating Action
&Transferred from Oriental Bank of Commerce Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. 1 crore = 10 million Refer to annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL AAA/Stable’ rating to Rs 3,000 crore infrastructure bonds of Punjab National Bank (PNB) and has reaffirmed its ‘CRISIL AAA/CRISIL AA+/Stable/CRISIL A1+’ ratings on the existing debt instruments.
CRISIL Ratings has also withdrawn its ratings on redeemed Tier II bonds (under Basel III) aggregating Rs. 2500 crore (See 'Annexure - Details of Rating Withdrawn’ for details) on receipt of requisite documentation for redemption and at issuer’s request. Further rating on Rs 560 crore lower Tier II Bonds, Rs 1390 upper Tier II bonds (under Basel II) and Rs 642.5 crore Perpetual Tier I Bonds (under Basel II) has been withdrawn based on issuer request as these remain unutilised post implementation of BASEL III implementation . The withdrawal is in line with the CRISIL Ratings’ policy on withdrawal of ratings.
The ratings on the debt instruments of PNB continue to factor in the expectation of strong support from the majority owner, Government of India (GoI), bank’s established market position, adequate capitalisation and healthy resource profile. These strengths are partially offset by modest, albeit improving asset quality and profitability. |
Analytical Approach For arriving at the ratings, CRISIL Ratings has considered the consolidated business and financial risk profile of PNB and its subsidiaries. The ratings continue to factor 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 the government 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 the government, 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 government 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, as part of GoI’s announcement in August 2019 regarding its plan to merge 10 PSBs into four and first round of capital infusion of Rs 55,250 crore for fiscal 2020, PNB and erstwhile UBI had received Rs 16,091 crore and Rs 1,666 crore respectively. Apart from these, PNB raised Rs 1,800 crore in fiscal 2022 and ~Rs 5,000 crore in September 2024 in the form of Qualified Institutional Placement (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 consolidated networth of Rs 1,17,070^ crore as on June 30, 2024. The standalone networth was Rs 1,11,860 crore^ and Tier I and overall CAR (under Basel III) was 13.04% and 15.79% respectively, as on June 30, 2024. Capitalisation has been supported by regular infusion from the government and ~Rs 25,006 crore total capital raised during fiscals 2022 to 2024 in the form of Tier-I and Tier-II. This includes QIP of Rs 1800 crore in fiscal 2022. Additionally, the bank has raised Rs 5000 crore in September 2024 through QIP, which will also support the overall capitalisation going forward.
On a standalone basis, the bank’s networth coverage of net NPA has improved to 18.9 times as on June 30, 2024, from 15.7 times as on March 31, 2024, and 4.4 times as on March 31, 2023. CRISIL Ratings believes that PNB will be able to maintain adequate capitalisation over the medium term, backed by capital support from the government. CRISIL Ratings believes the government will continue to provide distress support to all PSBs, including PNB. It will also support them in meeting Basel III capital regulations.
Established market position PNB is the third largest public sector bank with gross advances of Rs 10,28,682 crore as on June 30, 2024 (Rs 9,83,325 crore as on March 31, 2024) holding a market share of ~5.8% in the Indian Banking sector. It is the second largest public sector bank in terms of deposits which stood at Rs 14,08,247 crore as on June 30, 2024 (Rs 1,369,713 crore as on March 31, 2024).
The bank reported 4.6% growth in global advances on a q-o-q basis in first quarter of fiscal 2025 and 11% growth on-year in fiscal 2024. The Bank’s retail focus continues with retail, agriculture and MS ME (RAM) advances at 55.5% of gross advances as on June 30, 2024, against 55.2% as on March 31, 2024 (55.3% as on March 31, 2023). Corporate loans and overseas loans comprised 43% and 4% respectively as on June 30, 2024.
Healthy resource profile PNB has a large, stable and diversified resource profile and remains healthy. The bank had a large and geographically diversified deposit base which grew by ~2.3% q-o-q to Rs 14,08,247 crore as on June 30, 2024. The domestic CASA ratio declined to ~40.1% as on June 30, 2024 (~41.4% as on March 31, 2024). Moreover, term deposits (with size less than Rs 2 crore) and savings deposits comprised around 79.8% of total deposits as on June 30, 2024. The cost of domestic deposit stood at 5.08% in the first quarter of fiscal 2025 from 4.89% In fiscal 2024.
Overall, CRISIL Ratings believes that the bank will continue to maintain a healthy resource profile over the medium term.
Weaknesses: Modest asset quality, albeit on improving trend: PNB has reported improvement in the asset quality with gross non-performing assets (GNPA) improving to 4.98% (Rs 51,263 crore) as on June 30, 2024, against 5.73% (Rs 56343 crore) as on March 31, 2024, driven by improvement in both retail as well as corporate segments.
In retail, the gross NPA (GNPA) reduced to 1.4% (Rs 3340 crore) as on June 30, 2024, from 2.3% (Rs 5060 crore) as on March 31, 2024. Corporate loans GNPA reduced to 1.3% (Rs 5500 crore) as on June 30, 2024, from 1.9% (Rs 7953 crore) as on March 31, 2024. Agri and MSME loans contribute highest to the GNPAs with GNPA of 12.6% (Rs 21,301 crore) and 13.6% (Rs 19,499 crore) respectively as on June 30, 2024.
Overall slippage ratio (calculated as additions to NPA as a proportion of opening gross advances) was 0.76% in the first quarter of fiscal 2025 (annualised) as against 0.6% in fiscal 2024 and 1.8% in fiscal 2023.
The bank has enhanced its provision coverage to 88.4% as on June 30, 2024 from 87.9% and 70.8% as on March 2024 and March 2023 respectively, resulting in overall Net NPA improving to 0.6% as on June 30, 2024, from 0.7% as on March 31, 2024 and 2.7% as on March 31, 2023.
CRISIL Ratings expects the trajectory of improving asset quality metrics to continue going forward. The bank’s ability to improve its collection especially in the Agriculture and MSME segments, contain the slippages at current levels and thereby improve the overall asset quality remains a key monitorable.
Average, albeit improving, profitability PNB’s profitability was impacted in the past owing to elevated GNPA metrics, leading to higher credit costs. While the profitability has improved in the recent times, it remains average.
On a consolidated basis, PNB reported return on assets of 1% in the first quarter of fiscal 2025 against 0.6% for fiscal 2024. On a standalone basis, the bank reported return on assets (RoA) of 0.84% in the first quarter of fiscal 2025 against 0.55% in fiscal 2024 and 0.18% in fiscal 2023. This is supported by improvement in net interest margins and lower credit costs.
The Net Interest Income by average total assets was 2.72% for first quarter of fiscal 2025 against 2.65% in fiscal 2024 and 2.48% in fiscal 2023. Further credit costs to average total assets improved to 0.34% in the first quarter of fiscal 2025, from 0.8% and 1.3% in fiscal 2024 and fiscal 2023.
However, the bank’s ability to sustainably improve its overall earnings profile while containing credit costs 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 134.76% as on June 30, 2024, 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:
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:
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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 June 30, 2024. |
Key Financial Indicators: Consolidated
*annualized; CRISIL Ratings calculations
Key Financial Indicators: Standalone
*annualised; CRISIL Ratings calculations ^^PAT/average of total assets
^networth includes capital, reserves & surplus and minority interest |
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 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').
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 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 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 |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
^Yet to be issued
Annexure - Details of Rating Withdrawn
#Yet to be issued |
Annexure - List of Entities Consolidated
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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