Moody's Investors Service on Friday downgraded the long-term local and foreign currency deposit ratings of Bank of Baroda, Bank of India, Canara Bank and Union Bank of India to Ba1 from Baa3. The ratings agency also downgraded Baseline Credit Assessments (BCAs) of all the four lenders to B1 from Ba3.

The outlook on the ratings of the four banks is negative.

It affirmed Punjab National Bank's (PNB) long-term local and foreign currency deposit ratings at Ba1 and its BCA at B1 but changed its ratings outlook to negative from stable.

Deepening economic slowdown exacerbated by the coronavirus outbreak will strain the standalone credit strength of the banks, the agency said in a release.

Prolonged financial stress among households, weak job creation and a credit crunch among non-bank financial companies will lead to a rise in non-performing loans, delaying the ongoing clean-up of banks' balance sheets, it said.

On Bank of Baroda (BoB), Bank of India (BoI), Canara Bank and Union Bank, it said, "The BCA downgrades take into consideration rising risks to the banks' asset quality as a result of the severe economic contraction, which will result in an increase in credit costs." This increase in credit costs will hurt profitability and also strain the banks' modest capitalisation, reversing recent improvements, it said.

The agency, however, said funding and liquidity continue to be key credit strengths given their status as public sector banks, which results in good deposit franchises.

The banks' Ba1 long-term local and foreign currency deposit ratings incorporate three-notches of uplift from their B1 BCAs to reflect Moody's assumption of a very high probability of support from the government in times of need.

The agency further said the affirmation of PNB's Ba1 long-term local and foreign currency deposit ratings, which incorporates a three-notch uplift for government support from its B1 BCA, reflects its expectation that deteriorating asset quality and profitability will weigh on its capitalisation.

However, PNB's financial metrics had been improving prior to the economic slowdown, which combined with its good funding and liquidity mitigates the negative impact on its credit profile of deteriorating asset quality and profitability, it added.

Moody's said the negative outlook factors in further downside risks to the banks' financial profiles because of the country's uncertain operating environment.

The agency also said it has decided to withdraw the ratings of Bank of India and Bank of India (London) for its own business reasons.

Given the negative outlooks, the ratings of BoB, Canara, PNB and UBI are unlikely to be upgraded in the next 12-18 months, it said.

"Nevertheless, the rating outlooks could be changed to stable if macroeconomic conditions in India improve or if there are improvements in the banks' standalone credit strength, including strengthening capitalization or a less severe deterioration in asset quality than currently expected," it added.

Any indication of diminishing government support for the banks will also lead to a downgrade of their ratings, the agency said.

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