Singapore, March 11, 2019 -- Moody's Investors Service has taken rating actions on six Indian
public sector banks (PSBs): (1) Bank of India (BOI), (2) Canara
Bank (Canara), (3) Central Bank of India (CBI), (4) Indian
Overseas Bank (IOB), (5) Oriental Bank of Commerce (OBC) and (6)
Union Bank of India (Union Bank).
Moody's has upgraded the long-term local and foreign currency
deposit ratings of CBI and IOB to Ba2 from Ba3. Moody's has
also upgraded their Baseline Credit Assessment (BCA) and Adjusted BCA
to b2 from b3.
In the case of BOI, Canara, OBC and Union Bank, Moody's
has affirmed their local and foreign currency deposit ratings at Baa3/P-3.
Moody's has also affirmed their BCA and Adjusted BCA at ba3.
In addition, Moody's has assigned foreign currency counterparty
risk ratings (CRR) of Ba1/NP to CBI and IOB, and Baa3/P-3
to BOI, Canara, OBC and Union Bank.
Moody's has changed the outlook for CBI and IOB to stable from positive.
For BOI, Canara, OBC and Union Bank, Moody's has
maintained the outlook at stable.
Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_202770
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and identifies each affected issuer.
RATINGS RATIONALE
CAPITAL INFUSION FROM THE INDIAN GOVERNMENT IS THE KEY DRIVER OF THE RATING
ACTION
On 20 February 2019, the Indian government (Baa2 stable) announced
a capital infusion of INR482 billion into 12 public sector banks (PSBs).
The capital infusion largely formed the last tranche of the recapitalization
plan that was announced by the government in October 2017 for the PSBs
over a two-year period.
The capital allocation to the banks impacted by this rating action is
as follows: BOI: INR46.4 billion, CBI:
INR25.6 billion, IOB: INR38.1 billion and Union
Bank: INR41.1 billion. In addition, between
December 2018 and January 2019, OBC received INR66.9 billion,
CBI received INR16.8 billion and BOI received INR100.9 billion
in new capital. The capital infusions are in the form of recapitalization
bonds.
For CBI and IOB, which are among the weakest rated PSBs, the
rating upgrade reflects the improved solvency of the banks, following
the capital infusion from the government. Moody's estimates
that both banks will achieve a common equity tier 1 (CET1) of more than
8% by March 2019, creating a buffer above the regulatory
requirement under Basel III of 7.375%, which includes
a minimum CET1 requirement of 5.5% and a capital conservation
buffer of 1.875%. Based on risk-weighted assets
(RWA) at 31 December 2018, the CET1 ratios of CBI and IOB will be
9.0% and 9.7% following this latest round
of capital infusions.
The affirmation of BOI, OBC and Union Bank's ratings reflects
Moody's view that the capital infusion has alleviated some of the downside
risks to their BCAs, Adjusted BCAs and ratings. Moody's
estimates all three will also achieve a CET1 ratio comfortably above the
regulatory requirement. Based on December 2018 RWA, the CET1
ratios of BOI, OBC and Union Bank will be 10.7%,
10.2% and 9.0% following this latest round
of capital infusion.
Although Canara did not receive any capital infusion from the government
in the current fiscal year, the rating affirmation takes into account
Moody's expectation that the bank will be able to achieve a CET1
level in line with its other similarly rated peers, such as BOI,
OBC and Union Bank, given Canara's stable performance.
This rating action also factors in the improvement in the six banks'
asset quality.
At 31 December 2018, the net nonperforming loan (NPL) ratios of
CBI and IOB stood at 10.3% and 13.5%,
a decline from 11.1% and 15.3% at 31 March
2018. Similarly, for BOI, Canara, OBC,
and Union Bank, net NPL ratios fell to 5.9%,
6.4%, 7.2%, and 8.3%
from 8.3%, 7.5%, 10.5%,
and 8.4% over the same period.
The decline in net NPLs was driven by an increase in provisions,
with the banks using a part of the capital received for this purpose.
In addition, the pace of new NPL formation has significantly reduced
across all six banks in the first nine months of the financial year ending
March 2019 compared to the last three years.
With an improved loan loss coverage and stabilizing asset quality,
credit costs will be lower and result in improved profitability in 2020.
Funding and liquidity remains robust for all the banks impacted by this
rating action, even though their solvency profiles have been under
stress, due to rising NPLs and high credit costs.
Moody's continues to assume "very high" support for the rated PSBs,
reflecting the systemic importance of these banks in India. The
government owns a majority stake in these banks and is visibly involved
in their management, including the appointment of top management
and setting of key performance indicators. In addition, the
viability of PSBs is crucial for maintaining overall systemic stability,
given that these banks cumulatively account for more than 70% of
banking system assets. The support assumption results in a three
notch uplift to the six bank's long-term deposit ratings
from their Adjusted BCAs.
ASSIGNMENT OF FOREIGN CURRENCY CRR
The foreign currency CRR of Ba1/NP assigned to CBI and IOB, and
Baa3/P-3 to BOI, Canara, OBC and Union Bank,
is at the same level as the banks' respective domestic currency
CRR, which Moody's already assigned.
In assigning the CRR to the banks, Moody's applies its basic Loss
Given Failure (LGF) approach, because Moody's considers India not
to have an operational resolution regime. Moody's basic LGF analysis
positions CRRs in line with the banks' CRAs and one notch above their
Adjusted BCAs, prior to government support.
CBI and IOB's CRR incorporate three notches of uplift, while
BOI, Canara, OBC, and Union Bank's CRR incorporate
two notches of uplift, based on Moody's assessment of a very high
probability of government support, and given the banks' systemic
importance to India.
FACTORS THAT COULD LEAD TO AN UPGRADE
Given the stable outlook, the banks' ratings are unlikely
to face upward pressure over the next 12-18 months. However,
the outlook could be revised to positive, if there are signs of
a sustained improvement in the solvency profiles of these banks,
as represented by asset quality, capital and profitability.
FACTORS THAT COULD LEAD TO A DOWNGRADE
Moody's could lower the banks' BCA and ratings if further
credit losses worsen their capital. Any indication that government
support for the banks has diminished could also lead to a downgrade of
their ratings.
The principal methodology used in these ratings was Banks published in
August 2018. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Bank of India is headquartered in Mumbai, and reported assets of
INR6.1 trillion at 31 December 2018.
Canara Bank is headquartered in Bangalore, and reported assets of
INR6.7 trillion at 31 December 2018.
Central Bank of India is headquartered in Mumbai, and reported assets
of INR3.3 trillion at 31 December 2018.
Indian Overseas Bank is headquartered in Chennai, and reported assets
of INR2.4 trillion at 31 December 2018.
Oriental Bank of Commerce is headquartered in Gurugram, and reported
assets of INR2.5 trillion at 31 December 2018.
Union Bank of India is headquartered in Mumbai, and reported assets
of INR4.8 trillion at 31 December 2018.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
The below contact information is provided for information purposes only.
Please see the ratings tab of the issuer page at www.moodys.com,
for each of the ratings covered, Moody's disclosures on the
lead rating analyst and the Moody's legal entity that has issued
the ratings.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Alka Anbarasu
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Graeme Knowd
MD - Banking
Financial Institutions Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
