Moody’s downgrades PNB on impact of Nirav Modi fraud

Mumbai:Rating agency Moody’s Investors Service on Monday said Punjab National Bank (PNB) will need Rs12,000-13,000 crore in 2018-19 to meet regulatory requirements, while downgrading its rating.

“This estimate takes into account the ageing basis provisions for the NPLs (non-performing loans), the deferred provisions for the fraud, investment losses and employee benefit expenses as well as a reduction in risk weighted assets,” the rating agency said.

As per Reserve Bank of India rules, banks must maintain common equity tier-I ratio at 8%, including capital conservation buffer, by March 2019.

Moody’s downgraded PNB’s local and foreign currency deposit rating to Ba1/NP from Baa3/P-3, and also downgraded the bank’s baseline credit assessment and foreign currency issuer rating.

“The rating downgrade also reflects the weak internal controls and processes of the bank, given that the fraudulent transactions were undetected for a number of years. The bank’s weak earnings profile— as seen by its large stock of non-performing loans and the associated credit costs—will limit its ability to absorb the impact of the fraudulent transactions over the next 12-18 months,” Moody’s said.

Last week, PNB reported a Rs13,417 crore loss for the January-March period—the largest quarterly loss posted by an Indian lender— reeling under fraud, tighter loan classification norms and losses in its bond portfolio.

Rating agencies have downgraded PNB, citing capital concerns following a $2 billion fraud involving companies linked to jewellers Nirav Modi and Mehul Choksi. Fitch’s local arm, India Ratings, on Friday cut PNB’s long-term issuer rating to “IND AA+” with a negative outlook from “IND AAA”.

According to India Ratings, the downgrade also reflects the fall in PNB’s common equity tier-I ratio below what is prescribed by the regulator at March-end.

“PNB could continue to struggle with its core capitalisation level, both on an immediate and sustained basis, in the absence of a significant capital infusion from the government of India,” India Ratings said.

PNB has estimated its total exposure to group firms of Modi and Choksi, including letters of undertaking and other credit exposure, at Rs14,356 crore.

PNB has provided for half of this amount in the March quarter and said the remaining half would be spread across the three quarters of 2018-19.

Moody’s expects that PNB will receive capital support from the government and that the bank will be able to release some capital from the sale of its non-core assets such as real estate and partial stake sale in PNB Housing Finance Ltd.

“Nevertheless, these sources will unlikely prove sufficient to restore the bank’s capitalization to levels before the fraudulent transactions were discovered,” Moody’s said.