Additionally, Icra has reaffirmed the medium-term and short-term "highest safety" ratings of `MAAA' and `A1+' assigned to the bank's term-deposit and certificate of deposit programme (CD) respectively.

"The upgrade of long-term rating and reaffirmation of the medium-and short-term ratings take into account consistent improvement in asset quality, favourable low-cost deposit base and stable operating profits of the bank. The ratings factors in increased focus of the bank on recoveries and cautious lending approach, which is aimed at further improvement in asset quality", Icra said. Icra has noted that PNB's low capital adequacy, which the banks is proposing to address by way of an equity issue in short to medium term. It has also considered PNB's implicit sovereign support.During 1999-2000, the capital adequacy of the bank declined marginally to 10.31 per cent from 10.79 per cent in the previous fiscal.

PNB is planning for a public offer of equity shares in the short and medium-term, which would improve the capital adequacy. The proposed bond issue and the accretion to reserves from future profitability would further augment the capital adequacy of the bank. PNB has the largest investment portfolio as compared to its peer banks. Although this increases the vulnerability of the bank to adverse interest rate movements, the statutory liquidity ratio (SLR) investment portfoliio is free of credit risk. ICRA expects the investment fluctuation reserve and the unrealised appreciation in the SLR investment portfolio to provide adequate cushion against depreciation on investments.

The strong deposit base and high proportion of savings deposits continue to be the strength for the bank. "PNB continues to have the lowest cost of funds as compared to the peer banks.

However, this advantage of lowest cost of funds is mitigated to some extent by the higher operating expenses level" observes Icra.

PNB's operating profit remained stable in 1999-2000 as compared to the previous year despite increase in interest expense on account of prior period adjustment. T he net-profit of the bank improved in 1999-2000 on account of lower tax provisions and absence of depreciation of investment portfolio.