Rating Rationale

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; PNB, OBC and UBI received aggregate Rs 11,678 crore in fiscal 2018 and Rs 25,789 crore in fiscal 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 and UBI received Rs 16,091 crore and Rs 1,666 crore respectively. Thus, over the past three fiscals, GoI infused around Rs 55,224 crore into the combined entity.

Capitalisation of the merged bank is adequate with CET 1 ,Tier I and overall CAR at 9.44%, 10.25% and 12.63%, respectively as compared to 9.17%, 9.97% and 12.32% , respectively , as on April 1, 2020.

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 and post merger it has increased its market share to 6.8% of the system's advances as on June 30, 2020. It has become the second largest public sector bank in India. As on June, 30, 2020, PNB's total total business stood at Rs 17,96,612 crore with advances and deposits at Rs 7,21,695 crore and Rs 10,74,917 crore respectively. Bank's pan-India presence has also improved through a network of 10,930 branches as on June 30, 2020 (as compared to 6,593 branches for PNB standalone as on March 31, 2020). The Bank also has increased it share of Retail, agriculture and MSME advances to 53.2% as on June 30, 2020 (compared to 48.5% for PNB standalone as on March 31, 2020).

* Healthy resource profile:
The resource profile of the bank remains healthy. The bank had a large and geographically diversified deposit base of Rs 10,74,917 crore as on June 30, 2020 (Rs 10,71,569 crore as on March 31, 2020). The domestic CASA ratio was relatively steady at 43.45% as on June 30, 2020 (42.01% as on March 31, 2020). The average cost of deposit stood at 4.9% as on June 30, 2020. Overall, CRISIL believes that the bank will maintain a healthy resource profile over the medium term.

Weaknesses:
* Modest asset quality:
Asset quality for the merged bank remains modest but stable. GNPA of the bank stood at 14.11% as on June 30, 2020 (as compared to 15.49% as on June 30, 2019). The SMA-2 accounts are at just 1.5% of advances as on June 30, 2020 (5.2% as on June 30, 2019). Slippage as a percentage of opening net advances improved to 1.5% for first quarter of fiscal 2021 compared to 4.5% for fiscal 2020. The slippages primarily stemmed from the SME portfolio for the bank which faced challenges on account of nationwide lockdown and standstill in economic activity. SMA 2 accounts for the bank where asset classification benefit has been extended in the form of moratorium stood at Rs 6271.58 crore as on June 30, 2020 (which formed 0.9% of the gross advances).

With respect to the Covid-19 situation, PNB indicated that about 29% of the advances in terms of value had availed moratorium as on June 30, 2020. However, with moratorium being lifted any impact on collections and therefore, asset quality metrics remains a key monitorable. Going forward, CRISIL expects slippages from the large corporate accounts to be lower in the medium term as significant part of the stress is already recognised; however, impact of pandemic on the mid-corporate, SME and retail segments will be a key rating sensitivity factor.

* Modest profitability metrics:
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) stands at 65.34% as on June 30, 2020. The Bank has also provided aggressively for all NCLT accounts with PCR at 93.1%. For first quarter of fiscal 2021, the bank recorded a consolidated profit of Rs 475 crore (against a net loss of Rs 597 crore for fiscal 2020). Net interest margin and annualised return on assets (RoA) stood at 2.2% and 0.15% respectively as on June 30, 2020.

Asset quality may witness pressure because of the Covid-19 pandemic and possible slowdown in recoveries in the near to medium term. This could be partly offset by the restructuring scheme. Ability to contain deterioration in the asset quality will remain a key monitorable, as will the impact of this on the bank's profitability levels.