Moody’s affirms SBI ratings; upgrades, PNB, Bank of Baroda, Canara Bank

Moody’s Investors Service on Friday affirmed State Bank of India’s long-term currency deposit ratings at Baa3 and upgraded the ratings of three other public sector banks – Punjab National Bank, Canara Bank and Bank of Baroda – citing better macro-economic health and high level of government support to these lenders.

The long-term local and foreign currency bank deposit ratings of Bank of Baroda, Canara Bank, and Punjab National Bank (PNB) has been upgraded to Baa3 from Ba1. The outlooks on the long-term ratings of all four banks remain stable.

Moody's has also upgraded SBI's Baseline Credit Assessment (BCA) and additional tier 1 securities programme rating to ba1 and (P)B1 from ba2 and (P)B2, respectively.

Credit conditions in India have gradually improved, with a significant reduction in the banks' stock of legacy problem loans over the past three years, Moody’s Investors Service said in its rating action report.

“Corporates' financial health has also improved following a decade of deleveraging, while stress among non-bank financial institutions has abated. In addition, retail loans have performed well despite pandemic-induced economic stresses, indicating better underwriting quality and relatively low household leverage in India compared to those in many other Asian countries,” the ratings agency added.

However, loans to small and medium-size enterprises continue to pose risks to the banks' asset quality, Moody's said. The ratings agency expects this segment to be the most vulnerable to interest rate rises.

The affirmation of SBI's long-term deposit ratings at Baa3 and upgrade of Bank of Baroda, Canara Bank, and Punjab National Bank long-term deposit ratings to Baa3 from Ba1 reflect an improvement in India's Macro Profile to Moderate+ from Moderate, the improving credit metrics of the four banks and Moody's continued assumption of a very high level of government support to the banks in times of need, the agency said in its ‘ratings rationale’.

Moody's expects the banks' asset quality to be healthy over the next 12-18 months, helped by a supportive operating environment, improved corporate balance sheets, and better retail underwriting quality.

Asset quality and profitability of these four public sector banks have improved significantly in the last five years. The gross non-performing loan (NPL) ratios as of the end of September 2022 for SBI, Bank of Baroda, Canara Bank and PNB declined sharply to 3.5 per cent, 5.3 per cent, 6.4 per cent and 10.5 per cent, respectively, from 10.9 per cent, 12.3 per cent, 11.9 per cent and 18.4 per cent as of the end of March 2018. There has been a corresponding improvement in their net NPL formation rates as well.

The improvement in asset quality has translated into higher profitability because of lower credit costs. Moody's expects this increase in profitability to be sustainable over the next 12-18 months.

The banks' capitalisation has increased over the past two years, driven by capital raisings from equity markets. Their capitalisation will remain stable over the next 12-18 months.

Moody’s said that the funding and liquidity would remain key credit strengths of these banks given their status as public sector banks in India and linkages with the government, which result in good deposit franchises.

Moody's continues to assume a very high level of government support in these banks' ratings, leading to a one-notch uplift for SBI and three-notch uplift for the three other banks' deposit ratings from their BCAs. SBI is the largest bank in India by deposit market share, while the other three rank among the seven biggest banks in India, with deposit market shares ranging between 6 per cent and 7 per cent. Their systemic importance is further enhanced by the strong links to the government, the ratings agency said.