Fitch, Moody’s place PNB under watch for possible downgrade
Agencies keep an eye on PNB’S viability, currency deposit ratings
MUMBAI: Punjab National Bank (PNB), which disclosed a ₹11,400 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 (RWN). 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 also placed PNB’S local and foreign currency deposit rating of Baa3 and P-3, respectively, under review for downgrade. It said the bank’s stand-alone credit profile stood a risk of weakening because of the fraud, which is the primary driver for the rating action.
“The fraudulent transactions represent a contingent liability and the financial impact will be determined by the relevant law in India. Nevertheless, Moody’s expects that 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 that the state’s propensity to provide extraordinary support to PNB remains high, subject to the sovereign’s ability,” Fitch said.
Moody’s also said that 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 December 31, 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 the government—to comply with the minimum Basel III capital requirement of an 8% common equity tier 1 (CET1) ratio by March 31, 2019,” Moody’s said.
As at the end of 2017, PNB’S CET1 ratio was at 8.05%.
Analysts said that the rating action is unlikely to lead to higher cost of funds for PNB.
According to Asutosh Kumar Mishra, senior research analyst at Reliance Securities, Indian depositors are not so sensitive over these developments that they will fear losing money, especially with public sector banks.
“There are PSBS with far worse financials and we have not seen any deposit run. This is because majority of depositors factor in inherent government support. Scheduled commercial bank depositors have not ever lost any money in India because of a fraud or a scam. As far as market borrowing is concerned, I don’t the bank need 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),” he said.