Moody’s cuts PNB’s ratings

MOODY’S believes that PNB will receive capital support from the Indian government and that the bank will be able to release some capital from the sale of its non-core assets but these funds will not be enough.

Global rating agency Moody’s Investors Service has downgraded India’s second largest public sector bank Punjab National Bank’s (PNB) rating to “Ba1” from “Baa3” citing the adverse impact of the fraudulent transactions on the banks asset quality and capital position. It may impact the lender’s cost of funds.

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 nonperforming loans (NPLs) and the associated credit costs — will limit its ability to absorb the impact of the fraudulent transactions over the next 12-18 months. Furthermore, provisions relating to the fraudulent exposures will largely offset the benefit the bank will receive from the Indian government’s capital infusion plan,” the rating agency said.

Moody’s believes that PNB will receive capital support from the Indian government and that the bank will be able to release some capital from the sale of its non-core assets — such as its real estate holdings — as well as a partial stake sale in its listed housing finance subsidiary, PNB Housing Finance Limited.

Nevertheless, these sources will unlikely prove sufficient to restore the bank’s capitalisation to levels before the fraudulent transactions were discovered.

According to Moody’s estimate, PNB will require external capital of about `13,000 crore in fiscal 2019 to meet the minimum Basel III CET1 ratio by March 2019.