Moody’s Investors Service has downgraded the long-term local and foreign currency deposit ratings of four public sector banks — Bank of Baroda (BoB), Bank of India, Canara Bank and Union Bank of India (UBI) — to Ba1 from Baa3 and their baseline credit assessments (BCAs) to b1 from ba3. “The outlook on the ratings of the four banks is negative,” Moody’s said on Friday. However, the ratings agency affirmed Punjab National Bank’s (PNB) long-term local and foreign currency deposit ratings at Ba1 and its BCA at b1. But PNB’s ratings outlook has been changed to negative from stable. The economic shock from the coronavirus pandemic was exacerbating an already material slowdown in India’s economic growth, weakening borrowers’ credit profiles and hurting Indian banks’ asset quality, Moody’s said. “Prolonged financial stress among households, weak job creation and a credit crunch among non-bank financial companies will lead to a rise in non-performing loans, delaying the ongoing clean-up of banks’ balancesheets,” the rating agency said.It said the BCA downgrades take into consideration rising risks to the banks’ asset quality as a result of the severe economic contraction, which will result in an increase in credit costs. “This increase in credit costs will hurt profitability and also strain the banks’ modest capitalisation, reversing recent improvements. Funding and liquidity continue to be key credit strengths given their status as public sector banks, which results in good deposit franchises,” it added.On the affirmation of PNB’s Ba1 long-term local and foreign currency deposit ratings, which incorporates a three-notch uplift for government support from its b1 BCA, Moody’s said this reflected its expectation that deteriorating asset quality and profitability would weigh on its capitalisation.However, the ratings agency said PNB’s financial metrics had been improving prior to the economic slowdown, which, combined with the bank’s good funding and liquidity, mitigated the negative impact on its credit profile of deteriorating asset quality and profitability. “The three-notch uplift for government support reflects PNB’s deposit market share as well as its linkages with the government,” it said. On the negative outlook it said it had factored in further downside risks to the banks’ financial profiles because of India’s uncertain operating environment. Moody’s said it had decided to withdraw the ratings of Bank of India (London) for its own business reasons.
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