Fitch and ICRA Deliver Major Boost: PNB, Union Bank, and Bank of Baroda Ratings Upgraded on Strong Fundamentals

In a significant vote of confidence for India's public sector banking landscape, three of the country's largest lenders—Punjab National Bank (PNB), Union Bank of India, and Bank of Baroda (BoB)—have announced positive rating actions from international and domestic rating agencies. The upgrades, effective February 25, 2026, reflect sustained improvements in asset quality, profitability, and capitalization, set against an improving operating environment for Indian banks.

Here is a detailed breakdown of the rating actions and what they mean for investors and the financial system.

Fitch Upgrades PNB and Union Bank: Intrinsic Strength Recognized

Fitch Ratings simultaneously upgraded the Viability Ratings (VR) of both Punjab National Bank and Union Bank of India to 'bb' from 'bb-'. While their Long-Term Issuer Default Ratings (IDR) were affirmed at 'BBB-' with a Stable Outlook—driven by continued expectations of sovereign support—the upgrade in the VR is a critical indicator of their improving standalone financial health.

Key Drivers for PNB and Union Bank (Fitch):

Improving Operating Environment: Fitch recently revised the outlook on Indian banks' operating environment (OE) score to positive, citing enhanced regulations and supervision by the Reserve Bank of India (RBI).
Asset Quality Recovery: Both banks have seen a sharp reduction in impaired loan ratios. PNB's ratio fell to 3.2% in 9MFY26, while Union Bank's stabilized around 3.1%, supported by high provision coverage.
Stronger Profitability & Capital: Fitch noted improved profitability metrics, with operating profit/risk-weighted asset ratios holding firm. Union Bank's CET1 ratio was a robust 15.7%, comfortably above regulatory thresholds.
Better Risk Controls: Fitch revised the risk profile scores for both banks, acknowledging tighter underwriting standards and better loan diversification.

The "Government Support" Factor: Both banks retain their Government Support Ratings (GSR) of 'bbb-', equalized with India's sovereign rating. Fitch highlighted the government's 70%+ ownership in these banks and their systemic importance as key reasons for expecting strong state support if needed.

ICRA Assigns Highest Rating to Bank of Baroda's Green Bonds

Domestic rating agency ICRA also made waves by assigning its highest rating, [ICRA]AAA (Stable) , to Bank of Baroda's new Rs. 10,000 crore Long-Term Green Infrastructure Bond programme. Concurrently, ICRA reaffirmed the ratings on the bank's other instruments, including its infrastructure bonds and fixed deposit programmes.

Key Highlights for Bank of Baroda (ICRA):

Sovereign Backing & Market Position: As the second-largest Public Sector Bank (PSB) with majority ownership by the Government of India (63.97%), BoB benefits from an implicit sovereign guarantee of support.
Fortress Balance Sheet: ICRA highlighted BoB's strong capital position (CET1 ratio of 12.45%) and its well-developed deposit franchise, which gives it a competitive cost of funds.
Healthy Profitability: Despite some pressure on Net Interest Margins (NIMs), BoB’s profitability remains healthy with a Return on Assets (RoA) of 1.05% in 9M FY2026, supported by low credit costs.
Green Focus: The new AAA-rated green infrastructure bonds will be used to finance environmentally sustainable projects, aligning with global ESG trends while offering investors the highest level of safety.

ICRA also reaffirmed the bank's Basel III Tier-I (AT-1) bonds at [ICRA]AA+ (Stable) , noting that the bank's healthy distributable reserves provide a strong cushion for coupon payments.

Market Implications and Analyst Take

The synchronized rating upgrades signal a turning tide for Indian public sector banks, which have spent the last decade cleaning up legacy bad loans and strengthening their internal processes.

For Investors: The upgrades provide greater confidence in the credit profile of these institutions. The affirmation of 'BBB-' long-term ratings places these banks firmly in investment grade, crucial for attracting foreign institutional investment.
For the Banking Sector: Fitch’s positive outlook on the operating environment for Indian banks suggests that the entire sector is on a more stable footing, capable of supporting India's GDP growth, which Fitch forecasts to remain above 6% through FY27.
On ESG: Both Fitch and ICRA noted the improving governance structures and risk frameworks, though Fitch pointed out that government influence on lending strategies remains a moderating factor for the business profile scores.

What's Next?
According to the rating agencies, a further upgrade for these banks is possible if the sovereign rating of India is upgraded or if the banks can sustain their improved financial metrics in the long term, potentially leading to a revision of the operating environment score.