Moody’s, a global rating agency, has raised the long-term local and foreign currency deposit ratings of Bank of Baroda, Canara Bank, and Punjab National Bank from “Ba1” to “Baa3” due to an improvement in their credit profile and the overall economic conditions.

In addition to upgrading the long-term ratings, Moody’s also raised the Baseline Credit Assessment (BCA) of the State Bank of India and the three public sector banks – Bank of Baroda, Canara Bank, and Punjab National Bank. This upgrade is due to an improvement in India’s macroeconomic profile to “Moderate+” from “Moderate” and the banks’ credit metrics, according to a statement released by Moody’s on Friday.

The outlook for the long-term ratings of all four banks is stable, and Moody’s continues to assume a high level of government support for the banks in case of need. The rating agency also noted that credit conditions in India have been improving gradually, with a significant decrease in the banks’ stock of legacy problem loans over the past three years.

According to Moody’s, the financial health of corporates has also improved following a decade of debt reduction, and stress among non-bank financial institutions has also decreased. Additionally, retail loans have performed well despite the economic stresses caused by the pandemic, which is an indication of better underwriting quality and relatively low household leverage in India compared to other Asian countries.However, Moody’s also highlighted potential risks from rising interest rates and a slowdown in India’s economic growth. Loans to small and medium-sized enterprises (SMEs) were identified as a potential risk to the banks’ asset quality, as this segment is particularly vulnerable to interest rate increases.

Moreover, while India’s economic growth is expected to slow down due to increasing interest rates and a global economic slowdown, the country’s economy is still expected to perform better than that of other emerging markets. The upgrades to the BCA of the four banks reflect their improved asset quality and profitability. According to Moody’s, as of September 2022, the gross non-performing loan ratios for SBI, BOB, Canara and PNB have decreased significantly from their levels in March 2018.

The net formation rates of non-performing loans (NPLs) for these banks has also improved accordingly. Moody’s predicts that the banks’ asset quality will remain healthy over the next 12-18 months, due to a supportive operating environment, stronger corporate balance sheets, and better underwriting quality for retail loans. The improvement in asset quality has led to higher profitability, as credit costs have decreased. Moody’s also expects this increase in profitability to be sustainable over the next 12-18 months.