Fitch affirms Punjab National Bank at 'BBB-'/Stable

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Fitch affirms Punjab National Bank at 'BBB-'/Stable

Fitch Ratings-Mumbai/Singapore-10 February 2012: Fitch Ratings has affirmed India-based Punjab National Bank's (PNB) Long-Term (LT) Foreign-Currency (FC) Issuer Default Rating (IDR) at 'BBB-' and National LT rating at 'Fitch AAA(ind)'. The Outlook on both the LTFC IDR and National LT rating is Stable.

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Fitch Ratings-Mumbai/Singapore-10 February 2012: Fitch Ratings has affirmed India-based Punjab National Bank's (PNB) Long-Term (LT) Foreign-Currency (FC) Issuer Default Rating (IDR) at 'BBB-' and National LT rating at 'Fitch AAA(ind)'. The Outlook on both the LTFC IDR and National LT rating is Stable. Fitch has further published a National Short-term Rating of 'Fitch A1+(ind)'. A full rating breakdown is provided below.

The ratings factor in PNB's position as India's second-largest government bank and third-largest bank which, in the agency's view, lends itself to a high probability of government support, if required. The bank's LTFC IDR is currently at the Support Rating Floor and is linked to India's sovereign rating. The ratings also reflect PNB's standalone credit profile (Viability Rating: 'bbb-') which, despite asset quality challenges, remains supported by its robust domestic franchise, solid profitability, stable funding and reasonable capital buffer.

Reported gross NPL ratios continued to increase (FY11 (March year-end): 1.8%; 9MFY12: 2.4%) as economic slowdown gained traction with successive increases in interest rates. Given the bank's exposure to micro, small and medium sized corporates and agriculture, cyclical sectors dominated the major part of the NPLs, exacerbated by a non-performing large account in Q3FY12. While some of the cyclical issues should be resolved as interest rates start to fall (expected around mid-2012), Fitch notes the risks stemming from the bank's concentrated exposure (relative to peer banks) to stressed sectors particularly aviation, state electricity boards (SEBs) and power projects, which could see further restructuring in the near-term.

Incremental restructured loans rose to INR65bn (2.5% of loans) in 9MFY12 from INR32bn in FY11 (1.3%); over 50% of which came from the infrastructure sector. Fitch expects further restructuring to the tune of 3-4% of total loans (mainly from SEBs and aviation) and while there may be sufficient pre-provision buffer to absorb these incremental credit costs, it remains an overhang on long-term asset quality. The structural challenges facing these sectors are staggering, which may take longer than envisaged to resolve.

PNB's credit metrics are, however, supported by its solid margins and stable funding profile. The bank's strong net-interest margins (H1FY12: 3.8%; FY11: 3.9%), coupled with a competitive cost structure, translate into robust pre-provision operating profitability (H1FY12: 4.4% of average loans; FY11: 4.2%), ensuring adequate buffer for credit costs (H1FY12: 0.7%; FY11: 0.9%) even under a stress scenario. Its low-cost current/savings deposit ratio has been range-bound (H1FY12: 37.1%; FY11: 38.5%) despite migration towards term-deposits amid high interest rates. Retail deposits account for over 60% of total term deposits while the bank keeps adequate liquidity in government securities (in excess of statutory liquidity requirement). The latter is to meet short-term liquidity needs, given some dependence on volatile bulk and certificate of deposits.

Capitalisation has been well-supported by internal accruals and timely capital injection, but has trailed that of its peers since FY09, partly due to its above-average growth. Internal accruals coupled with expected capital injection of INR13bn from the government should provide reasonable capital buffer (9MFY12: 9.2% Tier 1 capital ratio; 12.8% total capital ratio) for FY12. However, going forward Fitch expects the bank to maintain above-average capital ratios in line with systemically important banks. Large and unexpected NPLs from the restructured accounts not backed by adequate capital support will likely result in a downgrade to the bank's VR.

The rating on PNB's lower tier 2 subordinated bonds is consistent with the approach taken for other similar performing securities based on Fitch's criteria.

The rating actions on PNB:
- LT FC IDR affirmed at 'BBB-'; Outlook Stable
- ST FC IDR affirmed at 'F3'
- Viability Rating affirmed at 'bbb-'
- Support Rating affirmed at '2'
- Support Rating Floor affirmed at 'BBB-'
- National Long-Term rating affirmed at 'Fitch AAA(ind)';

Outlook Stable:
- National Short-Term rating assigned 'Fitch A1+(ind)'
- INR10bn lower tier 2 subordinated bonds affirmed at 'Fitch AAA(ind)'
- INR150bn certificates of deposits programme affirmed at 'Fitch A1+(ind)'

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