Fitch affirms Union Bank of India, PNB rating at BBB- with stable outlook

Fitch Ratings on Tuesday affirmed the ratings of two public sector banks -- Union Bank of India and Punjab National Bank -- at 'BBB-' with a stable outlook.

The driving factors for the rating include government support, supportive operating environment, improved risk profile and improving asset quality, robust funding and liquidity.

Also, the agency has upgraded the banks' viability rating to 'bb-' from 'b+', and affirmed the Government Support Rating (GSR) at 'BBB-'. The VR upgrade is supported by ongoing improvements in the banks' risk profile, which are reflected in their financial performance.

In separate statements, Fitch has affirmed Union Bank of India and Punjab National Bank (PNB) Long-Term Issuer Default Rating (IDR) at 'BBB-' with a stable outlook. The stable outlook mirrors that of the sovereign's own rating, it added.

The affirmation of the rating is driven by the high probability of government support, considering the Indian government's 75% stake in Union Bank of India and 70% ownership in PNB and their systemic importance.

Fitch said growth in the Indian economy will support the lenders' ability to sustain profitable business in the medium term if risks are effectively managed.

With regards to Union Bank of India, the rating agency has revised the outlook on the bank's asset-quality score to positive from stable, as it expects the impaired-loan ratio to fall further, driving the core metric towards a higher category score.

Additionally, Fitch has revised Union Bank of India's risk profile score to 'b+' from 'b', reflecting positive developments such as greater loan diversification, reduced corporate loan risk, and limited exposure to unsecured retail loans, as well as its improving financial metrics. However, the bank's history of cyclical growth and risk appetite, and worsening financial metrics in challenging times remains a risk for the VR, it added.

Regarding PNB, Fitch said the bank's large nationwide franchise can support profitable business generation.

The agency has revised PNB's risk profile score to 'b+' from 'b', reflecting its improved loan mix diversification, clean-up of legacy bad loans evident from its improving financial metrics, and limited unsecured retail exposure.

Further, the outlook for PNB's asset-quality score has been revised to positive, from stable, as the agency expects the bank's impaired-loan ratio to fall further. The bank's impaired-loan ratio fell to 4.1% in 9MFY25, from 5.7 per cent in FY24.

It has revised PNB's earnings and profitability score to 'bb-' from 'b+' due to profitability improvements that exceeded the agency's expectations.