PNB fraud impact: Fitch, Moody's place lender's rating under watch

After the ~114 bn fraud in PNB, jewellers fear lenders will seek higher collateral and most firms who take the debt route to grow are exhausted in terms of providing security
Following the revelation of the Rs 114-billion fraud at Punjab National Bank (PNB), global rating agencies Fitch and Moody’s have placed the lender under watch for a possible downgrade.

Moody's has placed the bank's Baseline Credit Assessment (BCA) and adjusted BCA of ba3 and the Counterparty Risk Assessment (CRA) of Baa3(cr)/P-3(cr) under review for a downgrade. The agency cited “the risk of weakening of the bank's standalone credit profile, as a result of the discovery of a number of fraudulent transactions” as the primary driver of the rating action.

At the same time, Fitch Ratings has placed PNB’s viability rating of 'bb' on Rating Watch Negative (RWN). Fitch will resolve the rating watch after more clarity emerges on the extent of control failures and the impact on PNB's financial position. The RWN reflects the possibility of a downgrade of PNB's viability rating, following the detection of a large fraud at one of the bank's branches. At this stage, it does not view this event to have an impact on PNB's support rating floor (BBB-) due to the bank's high systemic importance as the second-largest state-owned bank.

"We believe that the state's propensity to provide extraordinary support to PNB remains high, subject to the sovereign's ability, which is captured in India's sovereign rating of BBB-,” Fitch said in a statement. Moody’s also assumed a “very high probability of government support for PNB in need”.  Moody’s also maintained that it is unlikely to upgrade PNB’s ratings for the next 12-18 months.

While the exact financial impact from this event is still being ascertained, the fraud highlighted the bank’s weak internal control and corporate governance, Moody’s said. Fitch said the fraud has raised questions about the quality of management supervision, considering that it went undetected for several years.

Both agencies said the fraud would have negative implications on its capital position. They said the bank’s image had been impacted, resulting in a drop in share price, and has limited its ability to raise funds from the equity market.

For the nine months of the financial year to December, PNB's non-performing loan (NPL) ratio eased to 12.1 per cent (from 12.5 per cent estimated for FY17).

Its Common Equity Tier-1 (CET1) ratio improved to 8.05 per cent from 7.9 per cent. Profitability continued to be weak but the bank raised Rs 50 billion ($770 million) in fresh equity from the capital markets in the third quarter of FY18.

PNB is also likely to get an additional Rs 54 billion ($850 million) from the government by the end of March 2018, under the government's recapitalisation plan.

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