INSUBCONTINENT EXCLUSIVE:
Fitch Ratings on Tuesday downgraded the Viability Rating of the Punjab National Bank (PNB) to 'bb-' from 'bb' and maintained the rating on
Rating Watch Negative (RWN) following a multi-crore fraud involving diamond trader Nirav Modi.
According to a Fitch statement, PNB's other
ratings were unaffected by this downgrade but it expressed doubts whether the bank management would be able to address the fraud
quickly.
"The downgrade follows our assessment of how losses resulting from fraudulent transactions reported in February 2018 will affect
the bank's financials, including its earnings and core capitalisation
The downgrade also reflects the bank's risk controls, which we think are weaker than what we had previously believed, since the fraud was
undetected for several years and acquired a large scale of $2.2 billion
That said, the bank plans to strengthen its risk control," the statement said.
Fitch said the PNB's Viability Rating reflected its weakened
capitalisation and profitability due to "larger-than-Fitch-expected deficiencies in management oversight and risk controls
This is somewhat offset by its robust funding and liquidity profile stemming from its significant domestic franchise.
"Fitch is uncertain
whether PNB's management will be able to address the fraud quickly, due to the involvement of various investigative agencies
A delay may affect recoveries, creating more capital demand
PNB's ability to withstand further shocks will be greatly diminished if adequate capital replenishment does not occur by way of internal or
external sources," the statement said.
Soon after the fraud was unearthed in February 2018, Fitch had warned the PNB -- one of the country's
biggest state-run banks -- of downgrading its Viability Rating.
The fraud of around $2.2 billion in PNB, the second largest in public
sector, was blamed on Nirav Modi and his uncle Mehul Choksi as well as weak banking oversight.
"The RWN reflects our belief that potential
losses will largely consume the $1.6 billion of capital injected in 2H18, pressuring the bank's capital buffers over the medium term
PNB's ability to sustain, if not improve, its buffers through sources such as retained earnings, fresh equity raising and stake sales is
important for its Viability Rating.
'We will resolve the RWN once we have greater clarity around the status of PNB's capital buffers and
earnings trend, but this may take six months or longer," Fitch said.
It said PNB's Support Rating of '2' and Support Rating Floor of 'BBB-'
remain unchanged due to the bank's high systemic importance as India's second-largest state-owned bank, which underpins the state's high
propensity to provide extraordinary support to PNB.
Fitch said that losses related to the fraud will act as a drag on PNB's overall credit
profile over the next year or two and will immediately increase the bank's non-performing loan (NPL) ratio and credit costs.
The regulatory
requirement to provide for 100 per cent of fraud-related losses will increase provisioning requirements, it said.
Fitch expects the bank to
report losses in the financial year ending in March 2018 (FY18) and most of FY19 and its gross NPL ratio to rise by at least 3 per cent of
loans by FY19.
However, profitability may improve faster than expectations in FY19 if some large NPL accounts were resolved during the
Loan-loss cover may not see large deterioration given the provisioning requirements, it added.
Fitch said: "'N' upgrade of the Viability
Rating is envisaged until the RWN is resolved."
