Rating Rationale
May 16, 2018 | Mumbai
Punjab National Bank
Rating revised to 'Watch Negative'  
 
Rating Action
Rs.5000 Crore Infrastructure Bonds  CRISIL AAA (Revised to 'Rating Watch with Negative Implications' from 'Rating Watch with Developing Implications')
Tier-II Bonds (Under Basel III) Aggregating Rs.3500 Crore  CRISIL AAA (Revised to 'Rating Watch with Negative Implications' from 'Rating Watch with Developing Implications')
Tier-I Perpetual Bonds (Under Basel II) Aggregating Rs.2663 Crore  CRISIL AAA (Revised to 'Rating Watch with Negative Implications' from 'Rating Watch with Developing Implications')
Upper Tier-II Bonds (Under Basel II) Aggregating Rs.7500 Crore  CRISIL AAA (Revised to 'Rating Watch with Negative Implications' from 'Rating Watch with Developing Implications')
Lower Tier-II Bonds (Under Basel II) Aggregating Rs.560 Crore  CRISIL AAA (Revised to 'Rating Watch with Negative Implications' from 'Rating Watch with Developing Implications')
Rs.3000 Crore Tier I Bonds (Under Basel III) CRISIL AA (Revised to 'Rating Watch with Negative Implications' from 'Rating Watch with Developing Implications')
1 crore = 10 million
Refer to annexure for Details of Instruments
Detailed Rationale

CRISIL has revised its rating watch on the debt instruments of Punjab National Bank (PNB) to 'Rating Watch with Negative Implications' from earlier 'Rating Watch with Developing Implications'. The rating action has been undertaken after bank reported 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 have weakened  with Common Equity Tier 1 ratio (CET1) and overall capital adequacy ratio at 5.95% and  9.20% respectively, as on March 31, 2018 as against 7.87% and 11.66% respectively the previous year.
 
CRISIL had placed the rating on Watch with developing implications on February 16, 2018, following the disclosure by the bank on February 14, 2018 that it had detected some fraudulent and unauthorised transactions in one of its Mumbai branches. The quantum of such transactions then was estimated at USD 1771.69 million (approximately Rs 11,300 crore). This incident has been referred to law enforcement agencies.
 
Since then, the quantum of such fraudulent and unauthorized transactions has increased to around Rs 14,357 crore. While, these transactions are still under investigation by various central investigating agencies, PNB is honoring the liabilities arising out of these transactions. Consequently, the liabilities that became due till 31st March 2018 on account of such transactions amounting to Rs 6,586 crore, have been paid off by PNB. PNB witnessed slippages to the tune of Rs 7,579 crores owing to these transactions.
  
In addition, PNB witnessed slippages amounting to around Rs 10,237 crore following the revised stressed assets framework announced by RBI in February 2018. Consequently, the gross non-performing assets (NPA) ratio for PNB spiked to 18.4% as on March 31, 2018 as against 12.5% as on March 31, 2017.
 
On account of the above, the bank has provided for Rs 7,178 crore or half of the total quantum of fraudulent and unauthorized transactions in the March 2018 quarter while the remaining half will be spread over next three quarters of fiscal 2019, in line with RBI's dispensation. Additionally, for slippages arising as a result of the revised stressed assets framework, the bank has made a provisioning of Rs 3120.2 crores. Consequently, the earnings profile for PNB was impacted with the bank reporting a full year loss of Rs 12,283 crore for fiscal 2018.
 
CRISIL is seeking clarity from the bank management to understand the quantum of crystallization of this contingent liability, prospects for recovery and expectation of additional capital support, amongst others. CRISIL will remove the ratings from Watch and take a final rating action once it has clarity on the same.
 
The ratings continue to factor in the expectation of strong support from the majority owner, Government of India (GoI), established franchise and strong market position in the Indian banking sector, healthy resource profile albeit weakening capitalization. The ratings also continue to factor the stress on PNB's asset quality especially in the corporate portfolio; the resultant increase in provisions would continue to impact profitability over medium term. The bank's gross NPA ratio increased to 18.38% as on March 31, 2018 (12.53% as on March 31, 2017 and 12.90% as on March 31, 2016). The CRISIL adjusted provision coverage ratio (PCR) stood at 43.8% as of March 31, 2018, while the bank's reported PCR was 58.4% as on the same date. During fiscal 2018, the bank raised capital amounting to Rs 5,000 crore via qualified institutional placement (QIP) in December 2017 while the GoI infused another Rs 5473 crore of capital in March 2018.

Analytical Approach

The ratings on PNB's debt instruments continue to factor in the strong support expected from its majority owner, the GoI.

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
 
* Established market position: 
PNB has a strong market position with a market share of around 5% of the system's advances as on March 31, 2018. It is among India's five largest PSBs by asset size, with an asset base of Rs 765,830 crore as on March 31, 2018 (Rs 720,331 crore as on March 31, 2017 and Rs 667,390 crore as on March 31, 2016). While the bank has a pan-India presence through a network of 6,983 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 642,226 crore as on March 31, 2018 (Rs 621,704 crore as on March 31, 2017 and Rs 553,051 crore as on March 31,2016). The domestic CASA ratio stood at 43.85% as on March 31, 2018 as against 45.97% as on March 31, 2017. The bank's cost of deposits stood at 5% for the year ending March 31, 2018 compared to 5.3% reported for the previous year. Overall, CRISIL believes that the bank will maintain a healthy resource profile over the medium term.
 
Weakness
* Weak asset quality
The bank's asset quality continues to be weak with gross NPA of 18.38% as on March 31, 2018 (12.53% as on March 31, 2017 and 12.90% as on March 31, 2016). On an absolute basis, the GNPA stood at Rs 86,620 crore as on March 31, 2018, up 56.4% Y-o-Y from Rs 55,370 crore previous year primarily driven by additions of Rs 7,579 crore with respect to the fraudulent and unauthorized transactions and Rs 10,237 crore due to new guidelines on resolution of stressed assets. The gross NPAs level remains high for the current rating category. The slippage ratio for the year ending March 31, 2018 rose to 10.5%(5.4% for fiscal 2017 and 11.2% in fiscal 2016). Therefore, CRISIL believes that the bank's NPAs will remain elevated over the next few quarters and remain weaker than peers.
 
* Weakened capitalisation
Capitalization has weakened with Tier I and overall capital adequacy ratios (under Basel III) of 7.12% and 9.2% respectively as on March 31, 2018 (8.91% and 11.66% respectively as on March 31, 2017 and 8.41% and 11.28% respectively as on March 31, 2016). Networth was Rs 41,074 crore as on March 31, 2018 (Rs 41,847 crore as on March 31, 2017). The bank's net worth coverage for net NPAs is low at 0.8 times as on March 31, 2018. CRISIL believes that PNB's capitalization will improve over the medium term primarily backed by capital support from GoI, reduction of risk weightage assets and tapping of markets as per the opportune mode and time.
 
* Modest profitability metrics for its rating category
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 on total income (net of interest charges) of Rs 23,803 crore as against net profit of Rs 1,325 crore on total income (net of interest expenses) of Rs 23,945 crore in the previous year. PNB reported a loan growth of 3.4% during fiscal 2018. While the cost of deposits have tapered down, the yield on advances has come under pressure thereby bringing down the CRISIL adjusted net interest margin (on average total assets) to 2.0% for fiscal 2018 from 2.16% in the previous year. Provisioning expenses rose by 70.5% Y-o-Y thereby causing the credit costs to rise to 3.0% for fiscal 2018 as against 1.9% for fiscal 2017. Profitability remains susceptible to high credit costs given continued slippages and rising provisioning requirement; PNB's CRISIL adjusted provisioning coverage ratio is relatively low at 43.8% as on March 31, 2018. The bank reported PCR (including technical write offs) stood at 58.4% as on March 31, 2018
About the Bank

PNB, established in 1895 in Lahore, Pakistan, expanded its operations through mergers and acquisitions before being nationalized in 1969. GoI owned 62.2% of PNB's equity share capital as March 31, 2018.

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 period ended March 31   2018 2017
Total Assets Rs crore 765,830 720,331
Total income (net of interest expenses) Rs crore 23,803 23,945
Profit after tax Rs crore -12,283 1,325
Gross NPA % 18.38 12.53
Overall capital adequacy ratio % 9.20 11.66
Return on assets % -1.65 0.19

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/ Watch with Negative Implications', 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 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/Watch Negative
INE160A  09165 Perpetual Tier-I Bonds (under Basel II) 20-Jul-07 10.40 %(First 10 Years)    10.90% (Subsequent Years) Perpetual 500 CRISIL AAA/Watch Negative
INE160A  09181 Perpetual Tier-I Bonds (under Basel II) 11-Dec-07 9.75 %(First 10 Years)    10.25% (Subsequent Years) Perpetual 300 CRISIL AAA/Watch Negative
INE160A  09199 Perpetual Tier-I Bonds (under Basel II) 18-Jan-08 9.45% (First 10 Years)    9.95% (Subsequent Years) Perpetual 300 CRISIL AAA/Watch Negative
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 AAA/Watch Negative
INE160A  09280 Perpetual Tier-I Bonds (under Basel II) 28-Aug-09 9.15 %(First 10 Years)    9.65% (Subsequent  Years) Perpetual 500 CRISIL AAA/Watch Negative
INE160A09314 Perpetual Tier-I Bonds (under Basel II) 27-Nov-09 9.00 %(First 10 Years)    9.50% (Subsequent  Years) Perpetual 200 CRISIL AAA/Watch Negative
NA Perpetual Tier-I Bonds (under Basel II)^ NA NA Perpetual 642.5 CRISIL AAA/Watch Negative
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 AAA/Watch Negative
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 AAA/Watch Negative
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 AAA/Watch Negative
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 AAA/Watch Negative
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 AAA/Watch Negative
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 AAA/Watch Negative
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 AAA/Watch Negative
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 AAA/Watch Negative
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 AAA/Watch Negative
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 AAA/Watch Negative
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 AAA/Watch Negative
NA Upper Tier-II Bonds (under Basel II)^ NA NA NA 1390 CRISIL AAA/Watch Negative
INE160A 08019 Tier II Bonds (Under Basel III) 24-Feb-14 9.65 24-Feb-24 1000 CRISIL AAA/Watch Negative
INE160A 08027 Tier II Bonds (Under Basel III) 28-Mar-14 9.68 28-Mar-24 500 CRISIL AAA/Watch Negative
INE160A 08035 Tier II Bonds (Under Basel III) 3-Apr-14 9.68 3-Apr-24 500 CRISIL AAA/Watch Negative
INE 160A 08043 Tier II Bonds (Under Basel III) 9-Sep-14 9.35 9-Sep-24 500 CRISIL AAA/Watch Negative
INE 160A 08050 Tier II Bonds (Under Basel III) 30-Sep-14 9.25 30-Sep-24 1000 CRISIL AAA/Watch Negative
INE 160A 08068 Infrastructure Bonds 9-Feb-15 8.23 9-Feb-25 1000 CRISIL AAA/Watch Negative
INE 160A 08084 Infrastructure Bonds 24-Mar-15 8.35 24-Mar-25 1800 CRISIL AAA/Watch Negative
NA Infrastructure Bonds^ NA NA NA 2200 CRISIL AAA/Watch Negative
NA Lower Tier-II Bonds (under Basel II)^ NA NA NA 560 CRISIL AAA/Watch Negative
^CRISIL is awaiting independent confirmation of redemption before withdrawing ratings on these instruments
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
16-05-18 		 CRISIL AAA/Watch Negative  16-02-18  CRISIL AAA/Watch Developing  12-09-17  CRISIL AAA/Negative  10-03-16  CRISIL AAA/Negative  23-03-15  CRISIL AAA/Stable  -- 
        25-01-18  CRISIL AAA/Stable  21-07-17  CRISIL AAA/Negative      20-01-15  CRISIL AAA/Stable   
            31-03-17  CRISIL AAA/Negative           
Lower Tier-II Bonds (under Basel II)  LT  560.00
16-05-18 		 CRISIL AAA/Watch Negative  16-02-18  CRISIL AAA/Watch Developing  12-09-17  CRISIL AAA/Negative  10-03-16  CRISIL AAA/Negative  23-03-15  CRISIL AAA/Stable  CRISIL AAA/Stable
        25-01-18  CRISIL AAA/Stable  21-07-17  CRISIL AAA/Negative      20-01-15  CRISIL AAA/Stable   
            31-03-17  CRISIL AAA/Negative           
Perpetual Tier-I Bonds (under Basel II)  LT  2663.00
16-05-18 		 CRISIL AAA/Watch Negative  16-02-18  CRISIL AAA/Watch Developing  12-09-17  CRISIL AAA/Negative  10-03-16  CRISIL AAA/Negative  23-03-15  CRISIL AAA/Stable  CRISIL AAA/Stable 
        25-01-18  CRISIL AAA/Stable  21-07-17  CRISIL AAA/Negative      20-01-15  CRISIL AAA/Stable   
            31-03-17  CRISIL AAA/Negative           
Tier I Bonds (Under Basel III)  LT  3000.00
16-05-18 		 CRISIL AA/Watch Negative  16-02-18  CRISIL AA/Watch Developing  12-09-17  CRISIL AA/Negative    --    --  -- 
        25-01-18  CRISIL AA/Negative  21-07-17  CRISIL AA/Negative           
Tier II Bonds (Under Basel III)  LT  3500.00
16-05-18 		 CRISIL AAA/Watch Negative  16-02-18  CRISIL AAA/Watch Developing  12-09-17  CRISIL AAA/Negative  10-03-16  CRISIL AAA/Negative  23-03-15  CRISIL AAA/Stable  CRISIL AAA/Stable 
        25-01-18  CRISIL AAA/Stable  21-07-17  CRISIL AAA/Negative      20-01-15  CRISIL AAA/Stable   
            31-03-17  CRISIL AAA/Negative           
Upper Tier-II Bonds (under Basel II)  LT  7500.00
16-05-18 		 CRISIL AAA/Watch Negative  16-02-18  CRISIL AAA/Watch Developing  12-09-17  CRISIL AAA/Negative  10-03-16  CRISIL AAA/Negative  23-03-15  CRISIL AAA/Stable  CRISIL AAA/Stable 
        25-01-18  CRISIL AAA/Stable  21-07-17  CRISIL AAA/Negative      20-01-15  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
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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