The Punjab National Bank (PNB)'s 13 per cent stake sale in PNB Housing Finance for Rs 1,850 crore will strengthen the bank's capital, said Moody's on Monday.
The report said that it estimates the sale will increase PNB's Common Equity Tier 1 (CET1) ratio by about 40 basis points from the 6.9 per cent reported in December 2018.
It added that coupled with the government capital infusion in February 2019 that increased the bank's pro forma CET1 ratio by around 150 basis points, the overall pro forma ratio is nearly 9 per cent.
"The bank's pro forma CET1 ratio comfortably exceeds the Basel III March 2019 regulatory requirement of 7.375 per cent, which includes a minimum CET1 requirement of 5.5 per cent and a capital conservation buffer of 1.875 per cent."
Upon the completion of the sale, the report said, "PNB will retain a 19.8 per cent stake in PNB Housing Finance worth around Rs 3,000 crore ($440 million)", which will remain a key potential source of capital for PNB given its limited access to the equity capital markets following the substantial decline in its share price over the past year".
"We estimate that sale of the remaining stake at a valuation similar to the current deal would increase PNB's CET1 ratio by approximately 70 basis points."
The late-March stake sale provided timely support to the bank's capitalisation, which has been challenged by high credit costs and investment losses, in addition to the negative effects of fraudulent transactions PNB discovered between February and March 2018.
Despite the bank's losses over the past few quarters, PNB's reported CET1 ratio has improved as a result of government capital infusions and a reduction in risk weighted assets, noted the report.
PNB's core profitability remains robust given its strong franchise as one of the leading public sector banks in India supported by a superior funding profile and strong net interest margins.
"We expect the bank's internal capital generation to improve gradually as declining credit costs alleviate pressure on its capitalisation..."