Rating Rationale
August 27, 2019 | Mumbai
Punjab and Sind Bank
Rating Reaffirmed 
 
Rating Action
Rs.500 Crore Tier II Bonds (Under Basel III)  CRISIL AA/Stable (Reaffirmed)
Rs.200 Crore Lower Tier-II Bonds (Under Basel II) CRISIL AA/Stable (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA/Stable' rating on Punjab and Sind Bank's (P&SB's) Tier-II bonds (under Basel III) and lower Tier II Bonds (under Basel II).

The rating continues to factor in expectation of strong support from majority owner, the Government of India (GoI), and the bank's adequate capitalisation. These strengths are partially offset by weak asset quality and modest earnings.

Analytical Approach

For arriving at the rating, CRISIL has considered the standalone business and financial risk profiles of P&SB. CRISIL has also factored in the strong support that the bank is expected to receive from its majority owner, the GoI, both on an ongoing basis and in the event of distress.

Key Rating Drivers & Detailed Description
Strengths
* Expectation of strong support from GoI
In its ratings on public sector banks (PSBs), CRISIL continues to factor in strong support from the GoI, which is both the majority shareholder and the guardian of India's financial system. Stability of the banking sector is of prime importance to the government, given the criticality of the sector to the economy, strong public perception of sovereign backing for PSBs, and severe implications of failure of any PSB in terms of political fallout, systemic stability, and investor confidence in public sector institutions. Majority ownership creates a moral obligation on the government to support PSBs, including P&SB.
 
As a part of the Indradhanush framework, the government had 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 a recapitalisation package of Rs 2.11 lakh crore over fiscals 2018 and 2019; P&SB received Rs 785 crore in fiscal 2018.
 
* Adequate capitalisation
P&SB has adequate capitalisation with Tier-I and overall capital adequacy ratio (CAR) of 9.58% and 11.35%, respectively, as on June 30, 2019 (9.5% and 10.93%, respectively, as on March 31, 2019). However, networth coverage for net non-performing assets (NPAs) remained low at 1.14 times as on June 30, 2019. Nevertheless, the capitalisation of the bank is expected to remain adequate in the near term.

Weaknesses
* Weak asset quality
Asset quality remains weak with gross NPA of 12.88% as on June 30, 2019, increased from 10.55% a year ago, partly driven by slippage in large corporate accounts and subdued growth in loan book. In absolute terms, gross NPAs increased to Rs 8,886 crore as on June 30, 2019 from Rs 7,363 crore a year ago. Slippages to NPA was 4.1% (annualised) for the quarter ended June 30, 2019 as against 5.5% in fiscal 2019. However, incremental lending to more granular assets such as retail, agriculture and micro, small and medium enterprise (MSME) book and better rated corporate accounts should reduce the slippages to NPAs from the current levels. Nevertheless, ability to arrest slippages, increase recoveries and thereby improve asset quality remain key monitorables.
 
* Modest earnings
Earnings have been impacted by deterioration in the asset quality. The bank reported a loss of Rs 543 crore for fiscal 2019 as against loss of Rs 744 crore in the previous fiscal, primarily driven by higher provisioning requirement; credit cost increased to 2.03% for fiscal 2019 from 1.65% in the previous fiscal. Further, for the quarter ended June 30, 2019, the bank reported loss of Rs 30 crore as against loss of Rs 398 crore for the corresponding period of previous fiscal. Nevertheless, the pre-provisioning profits as a proportion of average assets improved to 1.3% in fiscal 2019 from 1.1% in previous fiscal. The provision coverage ratio stood at 41.97% as on June 30, 2019. Ability to improve asset quality, and hence profitability, will remain a key monitorable.
Liquidity

Liquidity remains supported by a sizeable retail deposit base that forms a part of the total deposits. Liquidity coverage ratio was 166.35% as on June 30, 2019, against the regulatory requirement of 100%. The excess statutory liquidity ratio, which further cushioned liquidity, was Rs 1,222.29 crore (19.25% of net demand and time liabilities) as on that date. The bank's liquidity also benefits from access to systemic sources of funds such as the liquidity adjustment facility from the Reserve Bank of India (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.

Outlook: Stable

CRISIL believes P&SB will continue to benefit from the strong support from GoI, especially given the latter's recent capital infusions across PSBs. However asset quality and earnings are expected to remain under pressure over the medium term.

Rating Sensitivity Factors
Upside scenario:
* Substantial and sustained improvement in asset quality, resulting in further improvement in profitability

Downside scenario:
* Sharper-than-expected deterioration in asset quality, resulting in further weakening of profitability and capitalisation metrics.

About the Bank

P&SB is a relatively small PSB, founded in 1908 in New Delhi. The bank had a network of 1,518 branches as on June 30, 2019; 55% of its branches are in rural and semi-urban areas. With deposits of Rs 94,635 crore and advances of Rs 68,975 crore, the bank had market shares of ~0.8% in overall banking system deposits and advances as on June 30, 2019. Tier I, and overall CAR stood at 9.58% and 11.35%, respectively, as on June 30, 2019 (9.5% and 10.93%, respectively, as on March 31, 2019).

For fiscal 2019, the bank reported a loss of Rs 543 crore and total income (net of interest expenses) of Rs 3,108 crore, against a loss of Rs 744 crore and total income (net of interest expenses) of Rs 2,816 crore for the previous fiscal.

Key Financial Indicators
As on/for the year ended June 30, Unit  2019 2018
Total assets Rs crore 1,04,740 1,10,921
Total income (net of interest expense) Rs crore 735 862
Profit after tax Rs crore (30) (398)
Gross NPA % 12.88 10.55
Overall capital adequacy ratio % 11.35 10.46
Return on assets (annualised) % -0.11 -1.40

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-II Instruments (under Basel III)
The distinguishing feature of Tier-II capital instruments under Basel III is the existence of point of non-viability (PONV) trigger, occurrence of which may result in loss of principal to the investor, and hence, to default on the instrument by the issuer. According to Basel III guidelines, the PONV trigger will be determined by the RBI and is a remote possibility in the Indian context, given robust regulatory and supervisory framework and systemic importance of the banking sector. Inherent risk associated with the PONV feature is adequately factored into the rating on the instrument.
 
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of
Allotment
Coupon
Rate (%)
Maturity
Date
Issue Size
(Rs Cr)
Outstanding rating
with Outlook
INE608A09122 Debentures/Bonds 11-Jan-10 8.70 11-Apr-20 200 CRISIL AA/Stable
INE608A08017 Debentures/Bonds 19-Oct-16 7.99 19-Oct-26 500 CRISIL AA/Stable
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Lower Tier-II Bonds (under Basel II)  LT  200.00
27-08-19 
CRISIL AA/Stable      30-08-18  CRISIL AA/Stable  12-09-17  CRISIL AA/Negative  10-03-16  CRISIL AA/Negative  CRISIL AA/Stable 
            25-01-18  CRISIL AA/Stable  15-03-17  CRISIL AA/Negative       
Tier II Bonds (Under Basel III)  LT  500.00
27-08-19 
CRISIL AA/Stable      30-08-18  CRISIL AA/Stable  12-09-17  CRISIL AA/Negative  10-03-16  CRISIL AA/Negative  CRISIL AA/Stable 
            25-01-18  CRISIL AA/Stable  15-03-17  CRISIL AA/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

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