Rating Rationale
July 07, 2020 | Mumbai
Punjab National Bank
'CRISIL AA+/Watch Developing' assigned to Tier II Bonds (Under Basel III); Long-term rating continues on 'Watch Developing' 
 
Rating Action
Rs.1000 Crore Tier II Bonds (Under Basel III) CRISIL AA+ (Assigned; Placed on 'Rating Watch with Developing Implications')
Rs.500 Crore Tier II Bonds (Under Basel III)  CRISIL AA+ (Continues on 'Rating watch with Developing Implications')
Rs.1000 Crore Tier II Bonds (Under Basel III) CRISIL AA+ (Continues on 'Rating watch with Developing Implications')
Rs.5000 Crore Infrastructure Bonds CRISIL AA+ (Continues on 'Rating watch with Developing Implications')
Tier-II Bonds (Under Basel III) Aggregating Rs.3500 Crore  CRISIL AA+ (Continues on 'Rating watch with Developing Implications')
Tier-I Perpetual Bonds (Under Basel II) Aggregating Rs.2663 Crore  CRISIL AA+ (Continues on 'Rating watch with Developing Implications')
Upper Tier-II Bonds (Under Basel II) Aggregating Rs.7500 Crore  CRISIL AA+ (Continues on 'Rating Watch with Developing Implications)
Lower Tier-II Bonds (Under Basel II) Aggregating Rs.560 Crore CRISIL AA+ (Continues on 'Rating Watch with Developing Implications)
Rs.3000 Crore Tier I Bonds (Under Basel III)  CRISIL AA- (Continues on 'Rating Watch with Developing Implications)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL AA+' rating to Rs 1000 crore Tier II Bonds (Under Basel III) of Punjab National Bank (PNB) while placing the same on 'Rating Watch with Developing Implications'. The ratings on other long-term debt instruments continue on 'Rating Watch with Developing Implications'.
 
Earlier, on December 17, 2019, CRISIL had placed its rating on the long-term debt instruments of PNB on 'Rating Watch with Developing Implications'. This was owing to significant progress on the proposed amalgamation of six public sector banks (PSBs) into four anchor public sector banks (PSBs), including amalgamation of United Bank of India (UBI) and Oriental Bank of Commerce (OBC) with PNB.
 
On March 4, 2020, the Union Cabinet provided its approval to the amalgamation. The Board of Directors of the bank finalised the share exchange ratio on March 5, 2020, and the merger got effective from April 1, 2020.
 
The ratings continue on 'Watch Developing' as the financials of the amalgamated entity are yet to be finalised. CRISIL will resolve the rating watch once clarity emerges on the amalgamated entity's regulatory capital ratios, non-performing asset status and provisioning. CRISIL will also monitor for potential integration challenges and any impact on the earnings profile of the entity. On resolution of the rating watch, the rating on the new instrument is unlikely to move by more than one notch.
 
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. The ratings also factor in the modest asset quality and profitability metrics.
 
The nationwide lockdown (originally till April 14, 2020) declared by the Government of India to contain the spread of the Novel Coronavirus (Covid-19) will have near-term impact on disbursements, collections and asset quality of PNB. The lockdown is now further extended till July 31, 2020 in containment zones with re-opening of prohibited activities in a phased manner in areas outside containment zones. However, certain states have extended the lockdown till July 31, 2020. Herein, CRISIL believes that eventual lifting of restrictions will continue to be in a phased manner. Any delay in return to normalcy will exert further pressure on collections and hence asset quality metrics. The bank has also offered moratorium to its borrowers and hence, collections are expected to be low in the near term. Additionally, any change in the behaviour of borrowers on payment discipline can affect delinquency levels post the moratorium. Given this, gross non-performing assets (NPAs) of PNB, on a standalone basis, could increase from current levels due to higher deterioration across most of the segments. This in turn could lead to higher credit cost thereby impacting the profitability of the bank and will remain a key monitorable.

Analytical Approach

For arriving at the ratings, CRISIL 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 believes the majority ownership creates a moral obligation on GoI to support PSBs, including PNB. As part of the 'Indradhanush' framework, the government has 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, out of which PSBs were to receive Rs 88,139 crore from the government in fiscal 2018. PNB had been allocated Rs 5,473 crore out of this, for fiscal 2018, which it received in March 2018. Further, in the first half of fiscal 2019, GoI had infused around Rs 8,247 crore in the bank and an additional Rs 5908 crore in February 2019. Also, on August 30, 2019, GoI 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 has received Rs 16,091 crore. CRISIL 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.
 
* Established market position: 
PNB has a strong presence,on a standalone basis it has a market share of around 5% of the system's advances as on March 31, 2020. It is one of India's five largest PSBs by asset size, with an asset base of Rs 8,30,666 crore as on March 31, 2020 (Rs 7,74,949 crore as on March 31, 2019). While the bank has a pan-India presence through a network of 7040 offices as on March 31, 2020 (6,989 offices as on March 31, 2019), its market position is strong, primarily in North India.
 
* Healthy resource profile: 
The standalone resource profile of the bank remains healthy. The bank had a large and geographically diversified deposit base of Rs 7,03,846 crore as on March 31, 2020 (Rs 6,76,030 crore as on March 31, 2019). The domestic CASA ratio was relatively steady at 44.05% as on March 31, 2020 (43.51% as on March 31, 2019). Overall, CRISIL believes that the bank will maintain a healthy resource profile over the medium term.
 
Weaknesses:
* Pressure on asset quality:
Asset quality has improved in fiscal 2020 compared to fiscal 2019 but continues to remain under pressure, with gross NPA of 14.21% as on March 31, 2020 (15.5% as on March 31, 2019). Incremental slippages increased to 4.5% for fiscal 2020 as against 3.6% for fiscal 2019. The slippages primarily stemmed from the large corporate accounts portfolio for the bank.  CRISIL expects slippages to be lower in the medium term, with recoveries from IBC cases being a key monitorable.  
 
With respect to the Covid-19 situation, PNB has indicated that about 22% of the advances in terms of value had availed moratorium as on June 15, 2020, compared to a peak of 30%. However, with moratorium being lifted any impact on collections and therefore, asset quality metrics remains a key monitorable.
 
* Modest profitability metrics; however, expected to improve going ahead:
Profitability metrics are affected by asset quality weakness. For fiscal 2020, the bank recorded a profit of Rs 336 crore (against a net loss of Rs 9,975 crore for fiscal 2019). Net interest margin stood at 2.2% as on March 31, 2020 (2.2% in fiscal 2019) but remains significantly lower than in the past. Provisioning costs have reduced in fiscal 2020 and stood at 1.7% (as a percentage of average assets) (3.7% in fiscal 2019). Nevertheless, provisions pertaining to ageing of NPAs would continue, as PNB's CRISIL-adjusted provisioning coverage ratio (excluding technical write-offs) is average at 63% as on March 31, 2020 (62% as on March 31, 2019).
Liquidity Strong

Liquidity is comfortable, supported by a strong retail deposit base. Liquidity coverage ratio (based on simple average for daily observations) stood at 189.27% as on December 31, 2019, against the regulatory requirement of 80%. 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.

Rating Sensitivity factors
Upward factors:
* Improvement in asset quality and profitability on a sustained basis with the bank reporting RoA of over 1.5% on a steady state basis.
* The capitalisation metrics improving considerably with significant cushion over the regulatory requirements
 
Downward factors:
* Higher than expected deterioration in asset quality with GNPA increasing beyond current levels
* Decline in capital adequacy ratios (including CCB) with CET I remaining below 9.5% and overall CAR below 12.5% on sustained basis.
About the Bank

PNB, established in 1895 in Lahore, Pakistan, expanded its operations through mergers and acquisitions before being nationalised in 1969. The GoI owned 83.19% of PNB's equity share capital as on March 31, 2020. As on March 31, 2020, PNB's CET I ratio, Tier I and overall capital adequacy ratio (CAR) stood at 10.69%, 11.90% and 14.14% (6.21%, 7.49% and 9.73% respectively as on March 31, 2019).

For fiscal 2020, PNB reported net loss of Rs 336 crore on total income (net of interest expenses) of Rs 26,712 crore as against net loss of Rs 9,975 crore on total income (net of interest expenses) of Rs 24,533 crore, respectively, in fiscal 2019.

Key Financial Indicators
As on / for the year ended   2020 2019 2018
Total assets Rs crore 8,30,666 774949 765830
Total income (net of interest expenses) Rs crore 26,712 24534 23803
Profit after tax Rs crore 336 -9975 -12282
Gross NPA % 14.21 15.50 18.38
Overall capital adequacy ratio % 14.14 9.73 9.20
Return on assets % 0.04 -1.29 -1.65

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.
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').
 
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.
 
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.
 
Annexure - Details of Instrument(s)
ISIN No. Name of the Instrument Date of Allotment Coupon
rate (%)		 Maturity Date Issue Size  (Rs in crs) Complexity levels Rating assigned 
with outlook
NA Tier II Bonds (under Basel III)^ NA NA NA 1000 Highly Complex CRISIL AA+/Watch Developing
NA Tier I Bonds (under Basel III)* NA NA NA 3000 Highly Complex CRISIL AA-/Watch Developing
INE160A09165 Perpetual Tier-I Bonds (under Basel II) 20-Jul-07 10.40 %(First 10 Years)    10.90% (Subsequent Years) Perpetual 500 Highly Complex CRISIL AA+/Watch Developing
INE160A09181 Perpetual Tier-I Bonds (under Basel II) 11-Dec-07 9.75 %(First 10 Years)    10.25% (Subsequent Years) Perpetual 300 Highly Complex CRISIL AA+/Watch Developing
INE160A09199 Perpetual Tier-I Bonds (under Basel II) 18-Jan-08 9.45% (First 10 Years)    9.95% (Subsequent Years) Perpetual 300 Highly Complex CRISIL AA+/Watch Developing
INE160A09249 Perpetual Tier-I Bonds (under Basel II) 19-Jan-09 8.90 %(First 10 Years)    9.40% (Subsequent Years) Perpetual 220.5 Highly Complex CRISIL AA+/Watch Developing
INE160A09280 Perpetual Tier-I Bonds (under Basel II) 28-Aug-09 9.15 %(First 10 Years)    9.65% (Subsequent  Years) Perpetual 500 Highly Complex CRISIL AA+/Watch Developing
INE160A09314 Perpetual Tier-I Bonds (under Basel II) 27-Nov-09 9.00 %(First 10 Years)    9.50% (Subsequent  Years) Perpetual 200 Highly Complex CRISIL AA+/Watch Developing
NA Perpetual Tier-I Bonds (under Basel II)^ NA NA Perpetual 642.5 Highly Complex CRISIL AA+/Watch Developing
INE160A09173 Upper Tier-II Bonds (under Basel II) 12-Dec-07 9.35% (First 10 Years)    9.85% (Last 5 Years) 12-Dec-22 500 Highly Complex CRISIL AA+/Watch Developing
INE160A09207 Upper Tier-II Bonds (under Basel II) 5-Mar-08 9.35% (First 10 Years)    9.85% (Last 5 Years) 5-Mar-23 510 Highly Complex CRISIL AA+/Watch Developing
INE160A09215 Upper Tier-II Bonds (under Basel II) 27-Mar-08 9.45 %(First 10 Years)    9.95% (Last 5 Years) 27-Mar-23 600 Highly Complex CRISIL AA+/Watch Developing
INE160A09223 Upper Tier-II Bonds (under Basel II) 29-Sep-08 10.85 %(First 10 Years)    11.35% (Last 5 Years) 29-Sep-23 500 Highly Complex CRISIL AA+/Watch Developing
INE160A09231 Upper Tier-II Bonds (under Basel II) 22-Dec-08 8.95 %(First 10 Years)    9.45% (Last 5 Years) 22-Dec-23 500 Highly Complex CRISIL AA+/Watch Developing
INE160A09256 Upper Tier-II Bonds (under Basel II) 18-Feb-09 9.15 %(First 10 Years)    9.65% (Last 5 Years) 18-Feb-24 1000 Highly Complex CRISIL AA+/Watch Developing
INE160A09264 Upper Tier-II Bonds (under Basel II) 21-Apr-09 8.80 %(First 10 Years)    9.30% (Last 5 Years) 21-Apr-24 500 Highly Complex CRISIL AA+/Watch Developing
INE160A09272 Upper Tier-II Bonds (under Basel II) 4-Jun-09 8.37 %(First 10 Years) 8.87% (Last 5 Years) 4-Jun-24 500 Highly Complex CRISIL AA+/Watch Developing
INE160A09298 Upper Tier-II Bonds (under Basel II) 9-Sep-09 8.60 %(First 10 Years)     9.10% (Last 5 Years) 9-Sep-24 500 Highly Complex CRISIL AA+/Watch Developing
INE160A09306 Upper Tier-II Bonds (under Basel II) 27-Nov-09 8.50 %(First 10 Years)    9.00%(Last 5 Years) 27-Nov-24 500 Highly Complex CRISIL AA+/Watch Developing
INE160A09322 Upper Tier-II Bonds (under Basel II) 24-May-10 8.50 %(First 10 Years) 9.00% (Last 5 Years) 24-May-25 500 Highly Complex CRISIL AA+/Watch Developing
NA Upper Tier-II Bonds (under Basel II)^ NA NA NA 1390 Highly Complex CRISIL AA+/Watch Developing
INE160A08019 Tier II Bonds (Under Basel III) 24-Feb-14 9.65 24-Feb-24 1000 Complex CRISIL AA+/Watch Developing
INE160A08027 Tier II Bonds (Under Basel III) 28-Mar-14 9.68 28-Mar-24 500 Complex CRISIL AA+/Watch Developing
INE160A08035 Tier II Bonds (Under Basel III) 3-Apr-14 9.68 3-Apr-24 500 Complex CRISIL AA+/Watch Developing
INE160A08043 Tier II Bonds (Under Basel III) 9-Sep-14 9.35 9-Sep-24 500 Complex CRISIL AA+/Watch Developing
INE160A08050 Tier II Bonds (Under Basel III) 30-Sep-14 9.25 30-Sep-24 1000 Complex CRISIL AA+/Watch Developing
INE160A08068 Infrastructure Bonds 9-Feb-15 8.23 9-Feb-25 1000 Simple CRISIL AA+/Watch Developing
INE160A08084 Infrastructure Bonds 24-Mar-15 8.35 24-Mar-25 1800 Simple CRISIL AA+/Watch Developing
NA Infrastructure Bonds^ NA NA NA 2200 Simple CRISIL AA+/Watch Developing
NA Lower Tier-II Bonds (under Basel II)* NA NA NA 560 Complex CRISIL AA+/Watch Developing
INE160A08142 Tier II (under Basel III) 26-Dec-19 8.15 26-Dec-29 1500  Complex CRISIL AA+/Watch Developing
*Details awaited
^Yet to be issued
 
Annexure - List of entities consolidated
Entity consolidated Extent of consolidation Rationale for consolidation
PNB Gilts Full Subsidiary
PNB Investment Services Ltd. Full Subsidiary
Punjab National Bank (International) Ltd. Full Subsidiary
Druk PNB Bank Ltd Full Subsidiary
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
Infrastructure Bonds  LT  5000.00
07-07-20  		CRISIL AA+/(Watch) Developing      17-12-19  CRISIL AA+/Watch Developing  20-12-18  CRISIL AA+/Stable  12-09-17  CRISIL AAA/Negative  CRISIL AAA/Negative 
            05-09-19  CRISIL AA+/Stable  16-05-18  CRISIL AAA/Watch Negative  21-07-17  CRISIL AAA/Negative   
            26-06-19  CRISIL AA+/Stable  16-02-18  CRISIL AAA/Watch Developing  31-03-17  CRISIL AAA/Negative   
                25-01-18  CRISIL AAA/Stable       
Lower Tier-II Bonds (under Basel II)  LT  560.00
07-07-20  		CRISIL AA+/(Watch) Developing      17-12-19  CRISIL AA+/Watch Developing  20-12-18  CRISIL AA+/Stable  12-09-17  CRISIL AAA/Negative  CRISIL AAA/Negative 
            05-09-19  CRISIL AA+/Stable  16-05-18  CRISIL AAA/Watch Negative  21-07-17  CRISIL AAA/Negative   
            26-06-19  CRISIL AA+/Stable  16-02-18  CRISIL AAA/Watch Developing  31-03-17  CRISIL AAA/Negative   
                25-01-18  CRISIL AAA/Stable       
Perpetual Tier-I Bonds (under Basel II)  LT  2663.00
07-07-20  		CRISIL AA+/(Watch) Developing      17-12-19  CRISIL AA+/Watch Developing  20-12-18  CRISIL AA+/Stable  12-09-17  CRISIL AAA/Negative  CRISIL AAA/Negative 
            05-09-19  CRISIL AA+/Stable  16-05-18  CRISIL AAA/Watch Negative  21-07-17  CRISIL AAA/Negative   
            26-06-19  CRISIL AA+/Stable  16-02-18  CRISIL AAA/Watch Developing  31-03-17  CRISIL AAA/Negative   
                25-01-18  CRISIL AAA/Stable       
Tier I Bonds (Under Basel III)  LT  3000.00
07-07-20  		CRISIL AA-/(Watch) Developing      17-12-19  CRISIL AA-/Watch Developing  20-12-18  CRISIL AA-/Stable  12-09-17  CRISIL AA/Negative  -- 
            05-09-19  CRISIL AA-/Stable  16-05-18  CRISIL AA/Watch Negative  21-07-17  CRISIL AA/Negative   
            26-06-19  CRISIL AA-/Stable  16-02-18  CRISIL AA/Watch Developing       
                25-01-18  CRISIL AA/Negative       
Tier II Bonds (Under Basel III)  LT  1500.00
07-07-20  		CRISIL AA+/(Watch) Developing      17-12-19  CRISIL AA+/Watch Developing  20-12-18  CRISIL AA+/Stable  12-09-17  CRISIL AAA/Negative  CRISIL AAA/Negative 
            05-09-19  CRISIL AA+/Stable  16-05-18  CRISIL AAA/Watch Negative  21-07-17  CRISIL AAA/Negative   
            26-06-19  CRISIL AA+/Stable  16-02-18  CRISIL AAA/Watch Developing  31-03-17  CRISIL AAA/Negative   
                25-01-18  CRISIL AAA/Stable       
Upper Tier-II Bonds (under Basel II)  LT  7500.00
07-07-20  		CRISIL AA+/(Watch) Developing      17-12-19  CRISIL AA+/Watch Developing  20-12-18  CRISIL AA+/Stable  12-09-17  CRISIL AAA/Negative  CRISIL AAA/Negative 
            05-09-19  CRISIL AA+/Stable  16-05-18  CRISIL AAA/Watch Negative  21-07-17  CRISIL AAA/Negative   
            26-06-19  CRISIL AA+/Stable  16-02-18  CRISIL AAA/Watch Developing  31-03-17  CRISIL AAA/Negative   
                25-01-18  CRISIL AAA/Stable       
All amounts are in Rs.Cr.
Links to related criteria
Rating Criteria for Banks and Financial Institutions
CRISILs Criteria for Consolidation
Criteria for Notching up Stand Alone Ratings of Entities Based on Government Support
Rating Criteria for Hybrid Capital instruments issued by banks under Basel II guidelines
Rating criteria for Basel III - compliant non-equity capital instruments

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