Rating Rationale
December 20, 2018 | Mumbai
Punjab National Bank
Ratings downgraded to 'CRISIL AA+/CRISIL AA-/Stable', removed from 'watch negative'  
 
Rating Action
Rs.5000 Crore Infrastructure Bonds CRISIL AA+/Stable (Downgraded from 'CRISIL AAA' ; Removed from 'Rating Watch with Negative Implications')
Tier-II Bonds (Under Basel III) Aggregating Rs.3500 Crore  CRISIL AA+/Stable (Downgraded from 'CRISIL AAA' ; Removed from 'Rating Watch with Negative Implications')
Tier-I Perpetual Bonds (Under Basel II) Aggregating Rs.2663 Crore  CRISIL AA+/Stable (Downgraded from 'CRISIL AAA' ; Removed from 'Rating Watch with Negative Implications')
Upper Tier-II Bonds (Under Basel II) Aggregating Rs.7500 Crore  CRISIL AA+/Stable (Downgraded from 'CRISIL AAA' ; Removed from 'Rating Watch with Negative Implications')
Lower Tier-II Bonds (Under Basel II) Aggregating Rs.560 Crore  CRISIL AA+/Stable (Downgraded from 'CRISIL AAA' ; Removed from 'Rating Watch with Negative Implications')
Rs.3000 Crore Tier I Bonds (Under Basel III) CRISIL AA-/Stable (Downgraded from 'CRISIL AA' ; Removed from 'Rating Watch with Negative Implications')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has removed its ratings on the debt instruments of Punjab National Bank (PNB) from 'Rating Watch with Negative Implications' and downgraded the ratings to 'CRISIL AA+/CRISIL AA-' from 'CRISIL AAA/CRISIL AA'. CRISIL has also assigned a 'Stable' outlook on the long-term rating.

CRISIL had, in May 2018, revised its rating watch on the debt instruments to 'Rating Watch with Negative Implications' from earlier 'Rating Watch with Developing Implications'. This was subsequent to the bank reporting a loss of Rs 12,283 crore on account of elevated provisioning following higher slippages owing to fraudulent and unauthorized transactions and stricter guidelines by RBI related to resolution of stressed assets. Amidst the loss, the capitalisation ratios of the bank had also weakened.

The ratings have now been downgraded as the performance of the bank has remained weaker than earlier expectations. Asset quality and profitability metrics of the bank are not at the same level as 'CRISIL AAA'- rated public sector banks (PSBs). As on September 30, 2018, gross non-performing assets (NPAs) stood at 17.2% while profitability for first half of fiscal 2019 was at (-)1.4% (return on assets) on an annualized basis. While part of the higher NPAs are due to the fraud which was a one-off event, gross NPAs excluding the one-off event were still at around 14%, higher than CRISIL AAA-rated PSBs. Futher, slippages have remained elevated in the first half at around 5.3% (annualized). The CRISIL-adjusted proviosning coverage ratio (PCR) is also average at around 53%; provisioning costs will therefore remain high in the near term.

The 'Stable' outlook reflects the strength of the bank's franchise in terms of its established market position and healthy resource profile, which are expected to support the rating at current levels in the medium term. The outlook also factors in the expectation of asset quality and profitability improving hereon. CRISIL's analysis of the top exposures of the bank reveals that incremental slippages from corporate accounts are expected to moderate significantly from current levels over the medium term. Expected recoveries from NPAs referred for resolution under the Insolvency and Bankruptcy Code  will also support asset quality metrics going forward - in the first half itself of fiscal 2019, cash recoveries and upgradations were over Rs 10,500 crore. CRISIL has factored in an improvement of 250-300 basis points (bps) in gross NPA by end of this fiscal.Further, with the final tranche of fraud-related provisioning of around Rs 1900 crores of provisioning being completed in third quarter of fiscal 2019, and lower incremental slippages, profitability would also improve. Provisions related to ageing of NPAs would continue, but CRISIL believes that by the fourth quarter, this would be covered by the bank's pre-provisioning profits. Sale of non-core assets, primarily offloading of the bank's stake in PNB Housing Finance Limited, would also bolster profitability; while closure of the transaction may go beyond this fiscal, it would lower reliance on external capital support going ahead.

The ratings continue to factor in the expectation of strong support from the majority owner, Government of India (GoI).

Analytical Approach

The ratings on PNB's debt instruments continue to factor in the strong support expected from its majority owner, the GoI. This is because GoI is both the majority shareholder in public sector banks (PSBs) and the guardian of India's financial system. The stability of the banking sector is of prime importance to GoI, given the criticality of the sector to the economy, the strong public perception of sovereign backing for PSBs, and the severe implications of any PSB failure in terms of political fallout, systemic stability, and investor confidence in public sector institutions. CRISIL has fully consolidated the business and financial risk profile of PNB and its subsidiaries as CRISIL expects strong managerial and financial support given their high strategic importance and high moral obligation on account of majority shareholding and shared brand name.

Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation. 

Key Rating Drivers & Detailed Description
Strengths
* Strong expectation of support from the GoI:
The rating continues to factor in an expectation of strong government support, both on an ongoing basis and in the event of distress. This is because GoI is both the majority shareholder in public sector banks (PSBs) and the guardian of India's financial system. The stability of the banking sector is of prime importance to GoI, given the criticality of the sector to the economy, the strong public perception of sovereign backing for PSBs, and the severe implications of any PSB failure in terms of political fallout, systemic stability, and investor confidence in public sector institutions. CRISIL believes that the majority ownership creates a moral obligation on GoI to support the PSBs, including PNB. As part of the 'Indradhanush' framework, government has pledged to infuse at least Rs 70,000 crore in PSBs during fiscals 2015 to 2019, of which Rs 25,000 crore each was infused in fiscals 2016 and 2017. Further, in October 2017, the government had outlined recapitalisation package of Rs 2.11 lakh crores over fiscals 2018 and 2019, out of which PSBs were to receive Rs 88,139 crore from the government in fiscal 2018. PNB had been allocated Rs 5,473 crore out of this for the fiscal 2018, which it received in March 2018. Further, in the first half of fiscal 2019, GoI has infused around Rs 8,247 crore in the bank. CRISIL believes that GoI will continue to provide distress support to all PSBs and will not allow any of them to fail; it will also support them to meet Basel III capital regulations.

* Established market position:
PNB has a strong market position with a market share of around 5% of the system's advances as on September 30, 2018. It is among India's five largest PSBs by asset size, with an asset base of Rs 762,950 crore as on September 30, 2018 (Rs 765,830 crore as on March 31, 2018). While the bank has a pan-India presence through a network of 6,998 branches (as on March 31, 2018), its strong market position is primarily in North India.

* Healthy resource profile
PNB's resource profile remains healthy. The bank had a large and geographically diversified deposit base of Rs 649,726 crore as on September 30, 2018 (Rs 642,226 crore as on March 31, 2018). The domestic CASA ratio was relatively steady at 43.0% as on September 30, 2018 compared to March 31, 2018, though lower than 45.97% as on March 31, 2017. The bank's cost of deposits stood at 4.8% for the year ended March 31, 2018 and has been marginally higher in the first half of fiscal 2019. Overall, CRISIL believes that the bank will maintain a healthy resource profile over the medium term.

Weakness
* Pressure on asset quality
The bank's asset quality continues to be under pressure with gross NPA of 17.2% as on September 30, 2018. While this is lower in percentage and absolute terms compared to March 31, 2018, it remains high even after adjusting for the impact of the fraud. Moreover,  the slippages ratio remained elevated in the first half of the current fiscal at around 5.3% (annualized; 10.5% in fiscal 2018 and 5.4% in fiscal 2017). CRISIL expects slippages going ahead to be lower, and sizeable recoveries to continue, and will monitor these aspects. 

* Modest profitability metrics; however, expected to improve going ahead
Profitability metrics remain affected by persistent asset quality weakness. For the year ending March 31, 2018, the bank recorded a net loss of Rs 12,283 crore; losses remain high in the first half given elevated provisioning requirements. Pre-provisioning profitability, though, is steady -  net interest margins improved to 2.3% in the first half of fiscal 2019 from 2.0% in fiscal 2018, however, it remains significantly lower than past levels. High provisioning costs of 4.1% as a percentage of average assets in the first half of fiscal 2019 (4.0% in fiscal 2018) resulted in a large loss. Provisioning requirements on account of one-off fraud event are expected to be completed in the third quarter of fiscal 2019. Provisions pertaining to ageing of NPAs would continue as PNB's CRISIL adjusted provisioning coverage ratio (excluding technical write-offs) is average at 53%.
Outlook: Stable

CRISIL believes that PNB will continue to benefit from strong GoI support and maintain its healthy market position and resource profile over the medium term.The 'Stable' outlook also reflects CRISIL's expectations that incremental slippages for the bank will reduce going forward and coupled with healthy recoveries, will help in lowering gross NPA metrics. The outlook may be revised to 'Positive' in the event of higher than expected reduction in slippages and strong improvement in profitability, while the bank grows its loan book. Conversely, the outlook may be revised to 'Negative' in case of continued significant slippages and lower-than-expected recoveries, thereby impacting the bank's asset quality and profitability. 

Liquidity
The banks liquidity is comfortable supported by strong retail deposit base. The Liquidity Coverage Ratio of the bank stood at 147.4% as on September 30, 2018 as against the regulatory requirement of 90%. The bank's liquidity also benefits from access to systemic sources of funds, such as the liquidity adjustment facility from RBI, access to the call money market, and refinance limits from sources such as National Housing Bank and National Bank for Agriculture and Rural Development.

About the Bank

PNB, established in 1895 in Lahore, Pakistan, expanded its operations through mergers and acquisitions before being nationalized in 1969. GoI owned 66.1% of PNB's equity share capital as September 30, 2018. As on September 30, 2018, PNB's CET ratio, Tier I and overall capital adequacy ratio (CAR) stood at 6.49%, 7.78% and 10.08%.

For fiscal 2018, PNB reported net loss of Rs 12,283 crore on total income (net of interest expenses) of Rs 23,803 crore as against net profit of Rs 1325 crore on total income (net of interest expenses) of Rs 23,945 crore in fiscal 2017.

Key Financial Indicators
As on/for the half year ended September 30 Unit 2018 2017
Total Assets Rs crore 762,950 732,116
Total income (net of interest expenses) Rs crore 12335 12108
Profit after tax Rs crore -5472 904
Gross NPA % 17.2 13.3
Overall capital adequacy ratio % 10.1 11.6
Return on assets % -1.4% 0.25

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Note on Tier-I Instruments (under Basel III)
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 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 notches down the rating on these instruments from the bank's corporate credit rating. The rating on PNB's Tier-I bonds (under Basel III) has, therefore, been lowered by two notches from its corporate credit rating to 'CRISIL AA-/Stable', in line with CRISIL's criteria (refer to 'CRISIL's rating criteria for BASEL III compliant instruments of banks').

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 losses or low profits; or iii) the bank breaching the minimum regulatory Common Equity Tier-I  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.
 
Note on Tier-II Instruments (under Basel III)
The distinguishing feature of Tier-II capital instruments under Basel II is the existence of the point of non-viability (PONV) trigger, the occurrence of which may result in loss of principal to the investors and hence, to default on the instrument by the issuer.  According to the Basel III guidelines, the PONV trigger will be determined by the Reserve Bank of India (RBI). CRISIL believes that the PONV trigger is a remote possibility in the Indian context, given the robust regulatory and supervisory framework and the systemic importance of the banking sector. The inherent risk associated with the PONV feature is adequately factored into the rating on the instrument.
 
Note on Hybrid Instruments (under Basel II)
Given that hybrid capital instruments (Tier-I perpetual bonds and Upper Tier-II bonds; under Basel II) have characteristics that set them apart from Lower Tier-II bonds (under Basel II), the ratings on the two instruments may not necessarily be identical. The factors that could trigger a default event for hybrid instruments include: the bank breaching the regulatory minimum capital requirement, or the regulator's denial of permission to the bank to make payments of interest and principal if the bank reports losses. Hence, the transition from one rating category to another may be significantly sharper for these instruments than in the case of Lower Tier-II bonds; this is because debt servicing on hybrid instruments is far more sensitive to the bank's overall capital adequacy levels and profitability.
 
Annexure - Details of Instrument(s)
ISIN No. Name of the Instrument Date of Allotment Coupon rate (%) Maturity Date Issue Size   (Rs in crs) Rating assigned with Outlook
NA Tier I Bonds (under Basel III^ NA NA NA 3000 CRISIL AA-/Stable
INE160A  09165 Perpetual Tier-I Bonds (under Basel II) 20-Jul-07 10.40 %(First 10 Years)    10.90% (Subsequent Years) Perpetual 500 CRISIL AA+/Stable
INE160A  09181 Perpetual Tier-I Bonds (under Basel II) 11-Dec-07 9.75 %(First 10 Years)    10.25% (Subsequent Years) Perpetual 300 CRISIL AA+/Stable
INE160A  09199 Perpetual Tier-I Bonds (under Basel II) 18-Jan-08 9.45% (First 10 Years)    9.95% (Subsequent Years) Perpetual 300 CRISIL AA+/Stable
INE160A  09249 Perpetual Tier-I Bonds (under Basel II) 19-Jan-09 8.90 %(First 10 Years)    9.40% (Subsequent Years) Perpetual 220.5 CRISIL AA+/Stable
INE160A  09280 Perpetual Tier-I Bonds (under Basel II) 28-Aug-09 9.15 %(First 10 Years)    9.65% (Subsequent  Years) Perpetual 500 CRISIL AA+/Stable
INE160A09314 Perpetual Tier-I Bonds (under Basel II) 27-Nov-09 9.00 %(First 10 Years)    9.50% (Subsequent  Years) Perpetual 200 CRISIL AA+/Stable
NA Perpetual Tier-I Bonds (under Basel II)^ NA NA Perpetual 642.5 CRISIL AA+/Stable
INE160A  09173 Upper Tier-II Bonds (under Basel II) 12-Dec-07 9.35% (First 10 Years)    9.85% (Last 5 Years) 12-Dec-22 500 CRISIL AA+/Stable
INE160A  09207 Upper Tier-II Bonds (under Basel II) 5-Mar-08 9.35% (First 10 Years)    9.85% (Last 5 Years) 5-Mar-23 510 CRISIL AA+/Stable
INE160A  09215 Upper Tier-II Bonds (under Basel II) 27-Mar-08 9.45 %(First 10 Years)    9.95% (Last 5 Years) 27-Mar-23 600 CRISIL AA+/Stable
INE160A  09223 Upper Tier-II Bonds (under Basel II) 29-Sep-08 10.85 %(First 10 Years)    11.35% (Last 5 Years) 29-Sep-23 500 CRISIL AA+/Stable
INE160A  09231 Upper Tier-II Bonds (under Basel II) 22-Dec-08 8.95 %(First 10 Years)    9.45% (Last 5 Years) 22-Dec-23 500 CRISIL AA+/Stable
INE160A  09256 Upper Tier-II Bonds (under Basel II) 18-Feb-09 9.15 %(First 10 Years)    9.65% (Last 5 Years) 18-Feb-24 1000 CRISIL AA+/Stable
INE160A  09264 Upper Tier-II Bonds (under Basel II) 21-Apr-09 8.80 %(First 10 Years)    9.30% (Last 5 Years) 21-Apr-24 500 CRISIL AA+/Stable
INE160A  09272 Upper Tier-II Bonds (under Basel II) 4-Jun-09 8.37 %(First 10 Years) 8.87% (Last 5 Years) 4-Jun-24 500 CRISIL AA+/Stable
INE160A  09298 Upper Tier-II Bonds (under Basel II) 9-Sep-09 8.60 %(First 10 Years)     9.10% (Last 5 Years) 9-Sep-24 500 CRISIL AA+/Stable
INE160A09306 Upper Tier-II Bonds (under Basel II) 27-Nov-09 8.50 %(First 10 Years)    9.00%(Last 5 Years) 27-Nov-24 500 CRISIL AA+/Stable
INE160A09322 Upper Tier-II Bonds (under Basel II) 24-May-10 8.50 %(First 10 Years) 9.00% (Last 5 Years) 24-May-25 500 CRISIL AA+/Stable
NA Upper Tier-II Bonds (under Basel II)^ NA NA NA 1390 CRISIL AA+/Stable
INE160A 08019 Tier II Bonds (Under Basel III) 24-Feb-14 9.65 24-Feb-24 1000 CRISIL AA+/Stable
INE160A 08027 Tier II Bonds (Under Basel III) 28-Mar-14 9.68 28-Mar-24 500 CRISIL AA+/Stable
INE160A 08035 Tier II Bonds (Under Basel III) 3-Apr-14 9.68 3-Apr-24 500 CRISIL AA+/Stable
INE 160A 08043 Tier II Bonds (Under Basel III) 9-Sep-14 9.35 9-Sep-24 500 CRISIL AA+/Stable
INE 160A 08050 Tier II Bonds (Under Basel III) 30-Sep-14 9.25 30-Sep-24 1000 CRISIL AA+/Stable
INE 160A 08068 Infrastructure Bonds 9-Feb-15 8.23 9-Feb-25 1000 CRISIL AA+/Stable
INE 160A 08084 Infrastructure Bonds 24-Mar-15 8.35 24-Mar-25 1800 CRISIL AA+/Stable
NA Infrastructure Bonds^ NA NA NA 2200 CRISIL AA+/Stable
NA Lower Tier-II Bonds (under Basel II)^ NA NA NA 560 CRISIL AA+/Stable
^CRISIL is awaiting independent confirmation of redemption before withdrawing ratings on these instruments
 
Annexure - Details of Consolidation
Entity Consolidated Extent of Consolidation Rationale for Consolidation
PNB Gilts Full Subsidiary
PNB Investment Services Ltd. Full Subsidiary
Punjab National Bank (International) Ltd. Full Subsidiary
Druk PNB Bank Ltd Full Subsidiary
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Infrastructure Bonds  LT  5000.00
19-12-18  		CRISIL AA+/Stable  16-05-18  CRISIL AAA/Watch Negative  12-09-17  CRISIL AAA/Negative  10-03-16  CRISIL AAA/Negative  23-03-15  CRISIL AAA/Stable  -- 
        16-02-18  CRISIL AAA/Watch Developing  21-07-17  CRISIL AAA/Negative      20-01-15  CRISIL AAA/Stable   
        25-01-18  CRISIL AAA/Stable  31-03-17  CRISIL AAA/Negative           
Lower Tier II Bonds  LT                      CRISIL AAA/Stable 
Lower Tier-II Bonds (under Basel II)  LT  560.00
19-12-18  		CRISIL AA+/Stable  16-05-18  CRISIL AAA/Watch Negative  12-09-17  CRISIL AAA/Negative  10-03-16  CRISIL AAA/Negative  23-03-15  CRISIL AAA/Stable  -- 
        16-02-18  CRISIL AAA/Watch Developing  21-07-17  CRISIL AAA/Negative      20-01-15  CRISIL AAA/Stable   
        25-01-18  CRISIL AAA/Stable  31-03-17  CRISIL AAA/Negative           
Perpetual Tier I Bonds  LT                      CRISIL AAA/Stable 
Perpetual Tier-I Bonds (under Basel II)  LT  2663.00
19-12-18  		CRISIL AA+/Stable  16-05-18  CRISIL AAA/Watch Negative  12-09-17  CRISIL AAA/Negative  10-03-16  CRISIL AAA/Negative  23-03-15  CRISIL AAA/Stable  -- 
        16-02-18  CRISIL AAA/Watch Developing  21-07-17  CRISIL AAA/Negative      20-01-15  CRISIL AAA/Stable   
        25-01-18  CRISIL AAA/Stable  31-03-17  CRISIL AAA/Negative           
Tier I Bonds (Under Basel III)  LT  3000.00
19-12-18  		CRISIL AA-/Stable  16-05-18  CRISIL AA/Watch Negative  12-09-17  CRISIL AA/Negative    --    --  -- 
        16-02-18  CRISIL AA/Watch Developing  21-07-17  CRISIL AA/Negative           
        25-01-18  CRISIL AA/Negative               
Tier II Bonds (Under Basel III)  LT  3500.00
19-12-18  		CRISIL AA+/Stable  16-05-18  CRISIL AAA/Watch Negative  12-09-17  CRISIL AAA/Negative  10-03-16  CRISIL AAA/Negative  23-03-15  CRISIL AAA/Stable  CRISIL AAA/Stable 
        16-02-18  CRISIL AAA/Watch Developing  21-07-17  CRISIL AAA/Negative      20-01-15  CRISIL AAA/Stable   
        25-01-18  CRISIL AAA/Stable  31-03-17  CRISIL AAA/Negative           
Upper Tier II Bonds  LT                      CRISIL AAA/Stable 
Upper Tier-II Bonds (under Basel II)  LT  7500.00
19-12-18  		CRISIL AA+/Stable  16-05-18  CRISIL AAA/Watch Negative  12-09-17  CRISIL AAA/Negative  10-03-16  CRISIL AAA/Negative  23-03-15  CRISIL AAA/Stable  -- 
        16-02-18  CRISIL AAA/Watch Developing  21-07-17  CRISIL AAA/Negative      20-01-15  CRISIL AAA/Stable   
        25-01-18  CRISIL AAA/Stable  31-03-17  CRISIL AAA/Negative           
All amounts are in Rs.Cr.
Links to related criteria
Rating Criteria for Banks and Financial Institutions
CRISILs Criteria for Consolidation
Criteria for Notching up Stand Alone Ratings of Entities Based on Government Support
Rating Criteria for Hybrid Capital instruments issued by banks under Basel II guidelines
Rating criteria for Basel III - compliant non-equity capital instruments

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