Global rating agency Moody's Investors Service on Wednesday upgraded the outlook on Punjab National Bank (PNB) to 'positive' from 'stable' after the government announced its merger of Oriental Bank of Commerce and United Bank of India.
In a release, Moody's said it has affirmed the local and foreign currency deposit ratings of PNB at Ba1/NP, while Baseline Credit Assessments (BCA) and adjusted BCA were affirmed at b1.
"The PNB's ratings with a positive outlook reflects Moody's view that the bank's BCA will likely improve after the capital infusion from the government, and that its financial metrics will gradually improve," Moody's said in its statement.
Post-merger, PNB will become the second-largest public sector bank in India with a deposit market share of 8%, compared to its standalone market share of 5.2% as of March 2019. The agency expects the bank's asset quality and profitability to remain broadly unchanged following the merger.
The agency, however, said that the bank's enlarged market share will benefit its deposit franchise and help improve its funding.
The global rating firm has also maintained a stable outlook on Canara Bank, Oriental Bank of Commerce (OBC), Syndicate Bank and Union Bank. While the local and foreign currency deposit ratings of these public sector banks were maintained at Ba1/NP, the BCAs and Adjusted BCA were affirmed at ba3.
"The ratings reflect Moody's expectation that the acquiring banks will receive sufficient capital injections to absorb potential write-downs, if any, arising from the merger," Moody's said.
Post-merger, the agency expects that the banks will be able to maintain a common equity tier 1 (CET1) ratio above the Basel III requirement of 8%, which include the minimum CET1 ratio of 5.5% and a capital conservation buffer of 2.5%.
"Moody's expects the financial profiles of Canara Bank and Union Bank will fundamentally remain unchanged following the merger, and that the financial profile of PNB will strengthen, when compared to their financial profiles on a standalone pre-merger basis," it said.
The rating affirmation also considered the banks' enlarged market shares that will benefit their deposit franchises and help improve their funding, it added. It has also taken into account the measures announced by the government to improve the banks' operations, oversight and risk management, and that have the potential to structurally improve their credit profiles over time.
According to Moody's, the measures also give rise to some execution challenges and has not yet reflected the potential positive impact on the banks' ratings. It is notable that the public sector banks (PSBs) bank shares have been on selling spree following the government announcement to merge banks.
In a press briefing on August 30, Finance Minister Nirmala Sitharaman announced a mega consolidation plan for public sector banks, with the merger of 10 public sector banks into four to make them stronger and sustainable as well as increase their lending ability.
Edited by Chitranjan Kumar