The PNB fraud has raised questions on both internal and external risk controls at the bank as well as the quality of management supervision at the regulatory level, the rating agencies said. Photo: PTI
The PNB fraud has raised questions on both internal and external risk controls at the bank as well as the quality of management supervision at the regulatory level, the rating agencies said. Photo: PTI

PNB fraud: Fitch, Moody’s place bank under watch for possible ratings downgrade

While Moody's has placed Punjab National Bank under review, Fitch placed the bank on rating watch negative, reflecting possibility of ratings downgrade following the PNB fraud

Mumbai: Punjab National Bank (PNB), which disclosed a Rs11,400 crore fraud last week, is under the watch of international credit rating agencies for a possible rating downgrade.

On Tuesday, Fitch Ratings placed PNB’s viability rating, the stand-alone rating of the bank without any sovereign support, on rating watch negative. This reflects the possibility of a downgrade of PNB’s viability rating, currently at “BB", or speculative grade, following the detection of the fraud.

Separately, Moody’s Investors Service placed PNB’s local and foreign currency deposit rating of “Baa3" and “P-3", respectively, under review for downgrade. It said PNB’s stand-alone credit profile stood a risk of weakening because of the fraud, which is the primary driver for rating action. “The fraudulent transactions represent a contingent liability and financial impact will be determined by relevant law in India. Nevertheless, Moody’s expects PNB will need to provide for at least a substantial portion of the exposure. As a result, the bank’s profitability will likely come under pressure, although the actual impact will depend on the timing and quantum of provisions that need to be made, as well as any prospects for recovery," it said.

PNB has not responded to email seeking comment.

According to Fitch, while the exact financial impact from this event is still being ascertained, it has raised questions on both internal and external risk controls as well as the quality of management supervision, considering that the fraud went undetected for several years.

It also said that at this stage, it does not view this event to have an impact on PNB’s support rating floor (BBB-, essentially India’s sovereign rating) given its systematic importance of being the second largest public sector bank. “We believe the state’s propensity to provide extraordinary support to PNB remains high, subject to the sovereign’s ability," Fitch said.

Moody’s also said it assumes a high probability of government support for PNB in times of need. “The fraudulent transactions represent about 230 basis points of the bank’s risk-weighted assets as of 31 December 2017. As such, PNB’s capital position would deteriorate markedly, and fall below minimum regulatory requirements, if the bank is required to provide for the entire exposure. Consequently, PNB may need to raise capital externally—mainly from government—to comply with minimum Basel III capital requirement of an 8% common equity tier 1 (CET1) ratio by 31 March 2019," Moody’s said. As at end of 2017, PNB’s CET1 ratio was at 8.05%.

Analysts said the rating action is unlikely to lead to higher cost of funds for PNB.

“There are PSBs with far worse financials and we have not seen any deposit run. As far as market borrowing is concerned, I don’t think the bank needs funds right away because credit growth is yet to pick up sharply. Their credit-deposit ratio is way below their historical high and plus they are having excess SLR (statutory liquidity ratio securities)," Asutosh Kumar Mishra, senior research analyst at Reliance Securities, said.

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