Moody's Investors Service on Friday upgraded the long-term local and foreign currency bank deposit ratings of Bank of Baroda (BOB), Canara Bank, and Punjab National Bank (PNB) to Baa3 from Ba1.

The global credit ratings agency also upgraded the Baseline Credit Assessment (BCAs) of these three banks to ba3 from b1.

Moody's also affirmed the Baa3 long-term local and foreign currency bank deposit ratings of State Bank of India (SBI).

The outlooks on the long-term ratings of all four banks remain stable, it says.

The upgrade reflects an improvement in India's macro profile to "Moderate+" from "Moderate", the improving credit metrics of the four banks and Moody's continued assumption of a very high level of government support to the banks in times of need, the ratings agency says.

"Credit conditions in India have gradually improved, with a significant reduction in the banks' stock of legacy problem loans over the past three years. Corporates' financial health has also improved following a decade of deleveraging, while stress among non-bank financial institutions has abated," says Moody’s.

In addition, retail loans have performed well despite pandemic-induced economic stresses, indicating better underwriting quality and relatively low household leverage in India compared to those in many other Asian countries, the ratings firm adds.

Still, loans to small and medium-size enterprises continue to pose risks to the banks' asset quality as Moody's expects this segment to be the most vulnerable to interest rate rises.

While India's economic growth will moderate, driven by rising rates and a global slowdown, the Indian economy will perform better than emerging market peers, says Moody’s, adding that because of these factors, the operating environment will remain supportive for banks.

"The ratings upgrades of the four banks reflect their improved asset quality and profitability. The gross non-performing loan (NPL) ratios as of the end of September 2022 for SBI, BOB, Canara and PNB declined sharply to 3.5%, 5.3%, 6.4% and 10.5%, respectively, from 10.9%, 12.3%, 11.9% and 18.4% as of the end of March 2018," the credit rating agency says.

Moody's expects the banks' asset quality to be healthy over the next 12-18 months, helped by a supportive operating environment, improved corporate balance sheets, and better retail underwriting quality. The improvement in asset quality has translated into higher profitability because of lower credit costs. Moody's expects this increase in profitability to be sustainable over the next 12-18 months.

SBI is the largest bank in India by deposit market share, while the other three rank among the seven biggest banks in India, with deposit market shares ranging between 6% and 7%.

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