Mumbai: Moody’s Investors Service on Tuesday took rating action on five public sector banks that will undergo merger. While Moody’s affirmed stable outlook for banks including Canara Bank, Oriental Bank of Commerce, Syndicate Bank and Union bank of India, the rating agency changed the outlook on Punjab National Bank to positive from stable. The rating affirmation also reflect Moody's expectation that the acquiring banks will receive sufficient capital from the government to absorb any potential write-offs arising from the merger.
On 30 August, the government announced the merger between Oriental bank of Commerce and United Bank of India with Punjab National Bank, Syndicate Bank with Canara Bank, Corporation Bank and Andhra bank with Union bank, and India Bank with Allahabad Bank. The government also announced upfront capital infusion worth ₹55,250 crore out of the proposed ₹70,000 crore into these banks.
Post-merger, Moody's expects that the banks will be able to maintain a common equity tier 1 (CET1) ratio above the Basel III requirement of 8%, which include the minimum CET1 ratio of 5.5% and a capital conservation buffer of 2.5%.
In the case of PNB, Moody’s said that the bank’s asset quality and profitability will remain broadly unchanged following the merger.
"The affirmation of PNB's ratings with a positive outlook reflects Moody's view that the bank's Baseline Credit Assessment (BCA) will likely improve after the capital infusion from the government, and that its financial metrics will gradually improve," said the rating agency.
Post-merger, PNB will become the second largest public sector bank in India with a deposit market share of 8%, compared to its standalone market share of 5.2% as of March 201
In the case of Canara Bank, OBC, Syndicate Bank and Union Bank, given the stable outlook, the banks' ratings are unlikely to be upgraded over the next 12-18 months. Moody's affirmed the local and foreign currency deposit ratings of Canara Bank, OBC, Syndicate Bank and Union Bank at Baa3/P-3.
“The affirmation of Canara Bank and Union Bank's ratings with stable outlooks reflects Moody's view that post-merger, the banks' credit profiles will remain stable over the next 12-18 months, supported by moderately improving asset quality and profitability," said the agency," said the agency.
A Credit Suisse report had said that the merger will not lead to any meaningful revival in credit growth. "Coupled with the ongoing moderation in growth for private banks led by auto sector slowdown and increased cautiousness, credit growth, thus, is unlikely to be revived by PSB mergers," it said in a report dated 2 September. The merger is also unlikely to meaningfully revive the flow of credit to the liquidity pressed non-banking financial companies (NBFCs) as given the already high share of NBFC exposure in constituent banks, all four merged entities will have more than 10% of their loan exposure towards NBFCs, the report added.
“While the recap amount puts all four merged entities comfortably above the regulatory threshold of 8% common equity tier 1 (CET1), given the recent experience of SBI and BOB, we believe focus on integration affects near-term growth, and hence, expect growth to be impacted for them too," it said, adding that even as size and scale of operations increase, core profitability for these banks is likely to remain weak.