India Ratings & Research (Ind-Ra) has affirmed Punjab National Bank's (PNB) long-term issuer rating at 'AAA' with a stable outlook and short-term issuer rating at 'A1+'.
PNB's ratings are underpinned by expectations of extraordinary support from its majority and controlling shareholder, the government of India (59% stake as at end-December 2013), in case of a systemic crisis, due to the high importance of the bank in the Indian banking system. PNB is the fourth-largest government bank in India by loans and deposits and also has the second-largest branch network in the country as of end-December 2013.
The ratings also reflect PNB's robust pre-provision profit margins which are the best amongst government banks, an improved funding profile which lends superior competitiveness and a reasonable buffer of common equity capital. These structural strengths should enable the bank to absorb credit losses from any further sharp deterioration in asset quality, as continually demonstrated in Ind-Ra's stress tests on its rated banks.
PNB's elevated level of stressed assets (gross NPLs + standard restructured loans, 9MFYE14: 14.3%) compared to peer large government banks reflects the bank's relatively high exposure to stressed sectors, particularly infrastructure. Companies operating in the infrastructure sector continue to face execution pressures related to fuel availability, cost overruns and environmental clearances. Policy efforts to improve the operating environment, while positive, are not likely to immediately improve cash flows. Ind-Ra expects restructuring in the sector to continue, which may lead to an increase in PNB's stressed loans, but expects ultimate losses to be low as most projects remain viable and will generate cash over long useful lives.
PNB's common equity tier 1 (CET1) ratio (9MFYE14: 8.9%, including unaudited profits) is similar to that of other large government banks. Ind-Ra expects PNB to continue to maintain capital ratios well above the stated minimums, reflecting its status as one of India's largest banks and also believes the Reserve Bank of India will designate it as a systemically important bank. The agency estimates PNB will require about Rs 120 billion of common equity injections and Rs119billion as Additional Tier 1 capital through the Basel III implementation period till FYE19 to meet a tier 1 capital ratio of 11%.
Shares of the company gained Rs 30, or 3.99%, to settle at Rs 781.35. The total volume of shares traded was 192,589 at the BSE (Wednesday).
