Moody's cuts PNB, Canara & BoB outlook to negative

Last Updated: Fri, Dec 14, 2012 04:32 hrs

Rating agency Moody's on Thursday revised its rating outlook to negative from stable for three public sector banks (PSBs), saying their worsening asset quality was exerting pressure on profitability and capital.

These three - Punjab National Bank, Bank of Baroda and Canara Bank - have witnessed a rise in both gross non-performing assets (NPAs) and the restructured loan portfolio. Moody's said these banks were particularly challenged by the prevailing operating environment, characterised by high inflation and high interest rates.

Headline inflation, as measured by the wholesale price index, has been around the double-digit mark for three years, forcing the central bank into raising its prime lending rate 13 times between March 2010 and October 2011. The central bank had reduced the policy rate by 50 basis points in April but decided on status quo since then, as inflation stayed much above its medium-term comfort zone, of around five per cent.

PSBs have felt the pressure on asset quality much more than their private sector peers. As the pressure mounted, most of them lowered the provision coverage ratio over the past year.

According to Moody's, high inflation and interest rates are leading to economic slowdown and reducing the repayment ability of some corporate borrowers. Given the negative outlook, deposit ratings and supported debt ratings were unlikely to go up in the next 12-18 months, it said.

The agency also said individual banks' standalone ratings could come under pressure if asset quality, determined by gross NPAs and restructured and low provisioning cover, continue to deteriorate to a point where gross NPAs as a percentage of shareholder capital and loan loss reserves increase to over 35 per cent. And/or if pre-provision income as a percentage of year-end average risk weighted assets fall below 2.75 per cent.

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