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Moody’s Investors Service has downgraded the local and foreign currency deposit ratings of fraud-hit Punjab National Bank to Ba1/NP from Baa3/P-3.
The global credit rating agency has also downgraded the bank’s baseline credit assessment (BCA) and Adjusted BCA to B1 from Ba3.
These actions complete Moody’s review of PNB’s ratings initiated on February 20, following the bank’s announcement of the discovery of some fraudulent and unauthorised transactions (Nirav Modi and Mehul Choksi-perpetrated fraud) amounting to ₹14,400 crore ($2.2 billion) in February and March 2018.
Moody’s has also downgraded PNB’s foreign currency issuer rating to Ba1 from Baa3. And, the rating agency has downgraded the Counterparty Risk Assessment of the bank to Ba1(cr)/NP(cr) from Baa3(cr)/P-3(cr). The ratings outlook is stable.
Standalone profile
Moody’s said that deterioration of the standalone profile is the key driver of the rating actions.
The downgrades of the bank’s BCA and ratings reflect the negative impact of the discovery of a number of fraudulent transactions on the bank’s standalone profile, particularly its capital position.
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, Moody’s said. The bank’s weak earnings profile — as seen by its large stock of non-performing loans and 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 Centre’s (Baa2 stable) capital infusion plan.
Moody’s estimates that PNB will require external capital of ₹12,000-13,000 crore in FY19 to meet the minimum Basel III CET1 ratio of 8 per cent by March 2019, including a capital conservation buffer.
This estimate takes into account the basis provisions for the NPLs, the deferred provisions for the fraud, investment losses and employee benefit expenses as well as a reduction in risk-weighted assets.
On February 14, 2018, PNB announced to the stock exchange that it had discovered some fraudulent and unauthorised transactions amounting to ₹11,390 crore ($1.7 billion). Based on the bank’s subsequent announcements, PNB’s total exposure to these transactions amounts to ₹14,400 crore ($2.2 billion).
Moody’s expects that PNB will receive capital support from the Centre, 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.
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.
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