Rating Rationale

Strengths:
* Strong expectation of support from the GoI:
The rating continues to factor in 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 public sector banks (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 has infused around Rs 8,247 crore in the bank and an additional Rs 5908 crore in February 2019. 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, with a market share of around 5% of the system's advances as on March 31, 2019. It is one of India's five largest PSBs by asset size, with an asset base of Rs 774,949 crore as on March 31, 2019 (Rs 765,830 crore as on March 31, 2018). While the bank has a pan-India presence through a network of 6,989 branches (as on March 31, 2019), its market position is strong, primarily in North India.

* Healthy resource profile:
The resource profile remains healthy. The bank had a large and geographically diversified deposit base of Rs 676,030 crore as on March 31, 2019 (Rs 642,226 crore as on March 31, 2018). The domestic CASA ratio was relatively steady at 43.51% as on March 31, 2019, marginally lower than 43.8% as on March 31, 2018. Overall, CRISIL believes that the bank will maintain a healthy resource profile over the medium term.

Weaknesses:
* Pressure on asset quality:
Asset quality continues to be under pressure, with gross NPA of 15.5% as on March 31, 2019, albeit improved from 18.4% as on March 31, 2018. This improvement comes on the back of lower incremental slippages during fiscal 2019. CRISIL expects slippages to be lower in the medium term, with recoveries from IBC cases being a key monitorable.

* Modest profitability metrics; however, expected to improve going ahead:
Profitability metrics are affected by persistent asset quality weakness. For the year ending March 31, 2019, the bank recorded a net loss of Rs 9,975 crore. Net interest margin improved to 2.2% in fiscal 2019, from 2.0% in fiscal 2018, but remains significantly lower than in the past. High provisioning cost of 3.7%, as a percentage of average assets, in fiscal 2019 (4.0% in fiscal 2018) resulted in the bank reporting losses. Provisions pertaining to ageing of NPAs would continue, as PNB's CRISIL-adjusted provisioning coverage ratio (excluding technical write-offs) is average at 62%.