Punjab National Bank - 'CRISIL AA+/Stable' assigned to Tier II Bonds Under Basel III

CRISIL Ratings has assigned its 'CRISIL AA+/Stable' rating to the Rs.2000 crore tier II bonds (under Basel III) of Punjab National Bank (PNB). CRISIL Ratings has also reaffirmed its 'CRISIL AA+/CRISIL AA/Stable/CRISIL A1+' ratings on the Tier II Bonds (under Basel III), Lower Tier II Bonds (Under Basel II), Perpetual Tier I Bonds (Under Basel II), Tier I Bonds (Under Basel III), Infrastructure Bonds and Certificate of Deposits.

The rating of Tier I bonds (under Basel III) factors in position of PNB to make future coupon payments, supported by an adjustment of accumulated losses with share premium account, and the improved capital ratios. Pursuant to the adjustment, the eligible reserve to total assets ratio for the bank has improved. CRISIL has also taken into consideration, Department of Financial Services Gazette notification no. CG-DL-E-23032020-218862 (S.O. 1200 E) dated 23.03.2020 referred to as Nationalised Banks (Management and Miscellaneous Provisions) Amendment Scheme, 2020, which specifies that share premium reserves can be utilised to set off any losses in future. PNB has significant share premium reserves which can be utilised in the future, if required, thereby protecting from any depletion in eligible reserves. This supports the credit profile of Tier I (under Basel III) instruments. CRISIL Ratings also notes precedents whereby many banks have initiated the process of setting off losses with share premium reserves successfully. However, any substantial depletion of the share premium account or any regulatory changes to appropriation of the share premium account pertaining to adjustment of accumulated losses are key monitorables.

Supported by Tier I Equity raise of Rs 1800 crore via Qualified Institutional Placement during Q1FY22 and higher accrual, PNB's capital ratios have improved, as reflected in Tier 1 and Overall capital to risk-weighted adequacy ratio (CRAR) of 12.5% and 15.2%, respectively, as on June 30, 2021 as against 11.5% and 14.3%, respectively, as on March 31, 2021.

The outstanding ratings on the debt instruments of PNB continue to factor in the expectation of strong support from the majority owner, Government of India (GoI), established market position and the bank's healthy resource profile. The ratings also factor in the modest asset quality and profitability metrics.

The rating on the Tier I bonds (under Basel III) meets 'CRISIL's rating criteria for BASEL III-compliant instruments of banks'. CRISIL Ratings evaluates the bank's (i) reserves position (adjusted for any medium-term stress in profitability) and (ii) cushion over regulatory minimum CET1 (including CCB) capital ratios. Also evaluated is the demonstrated track record and management philosophy regarding maintenance of sufficient CET1 capital cushion above the minimum regulatory requirements.

The distinguishing features of non-equity tier I capital instruments (under Basel III) are the existence of coupon discretion at all times, high capital thresholds for likely coupon non-payment, and principal write-down (on breach of a pre-specified trigger). These features increase the risk attributes of non-equity tier I instruments over those of tier II instruments under Basel III, and capital instruments under Basel II. To factor in these risks, CRISIL Ratings notches down the rating on these instruments from the bank's corporate credit rating.

The factors that could trigger a default event for non-equity tier I capital instruments (under Basel III), resulting in non-payment of coupon, are: i) the bank exercising coupon discretion; ii) inadequacy of eligible reserves to honour coupon payment if the bank reports a loss or low profit; or iii) the bank breaching the minimum regulatory Common Equity Tier I (CET I; including the Capital Conservation Buffer) ratio. Moreover, given the additional risk attributes, the rating transition for non-equity tier I capital instruments (under Basel III) can potentially be higher and faster than that for tier II instruments.

In line with relief measures announced by the Reserve Bank of India (RBI) during the Covid-19 pandemic, PNB had provided a moratorium to its borrowers. Though collections declined during the initial months of moratorium, they moved up subsequently. However, the second wave of the pandemic led to intermittent lockdowns and localised restrictions, thus impacting collections once again. Although the impact has been moderate during this phase, any adverse change in payment discipline of borrowers may lead to higher delinquencies.

Under the RBI's resolution framework 1.0 and RBI's resolution framework 2.0 announced by the RBI, PNB has restructured 1.8% of gross advances as on June 30, 2021. However under RBI's resolution framework 2.0 announced in May 2021, restructuring stands at 0.9% of gross advances; the ratio could be higher and is still under review. Bank has also disbursed 1.7% of gross advances to MSME segment under the ECLGS scheme. Nevertheless, the ability of the bank to manage collections and asset quality going forward this fiscal, is a key monitorable. Going forward too, the impact of the third wave of the pandemic, if and when it comes in terms of its spread, intensity and duration, will also be closely monitored.

Shares of Punjab National Bank was last trading in BSE at Rs. 41.05 as compared to the previous close of Rs. 41.1. The total number of shares traded during the day was 5451871 in over 10225 trades.

The stock hit an intraday high of Rs. 41.75 and intraday low of 40.75. The net turnover during the day was Rs. 224152854.

Source : Equity Bulls

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