Moody's places PNB's ratings under review for downgrade

Moody's Investors Service on Tuesday placed under review for downgrade Punjab National Bank's (PNB) local and foreign currency deposit rating of Baa3/P-3 and foreign currency issuer rating Baa3, an official statement said here.

It said "likely financial impact of the fraudulent transactions is the key driver for the review for downgrade."

At the same time, 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 downgrade. 

PNB, the second largest public sector bank in India, has detected a $1.8 billion fraud in one of its branches in Mumbai, which is being investigated by the Central Bureau of Investigation and the Enforcement Directorate. The amount of fraudulent transactions is equivalent to eight times the bank's net income of about Rs 1,320 crore ($206 million). 

"The primary driver for today's rating action is the risk of weakening of the bank's standalone credit profile, as a result of the discovery of a number of fraudulent transactions. On February 14, 2018, PNB announced to the Indian stock exchanges that the bank had discovered some fraudulent and unauthorized transactions amounting to Rs 113.9 billion ($1.8 billion)," Moody's said.

The credit rating agency said the fraudulent transactions represent a contingent liability and the financial impact would 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," the statement said.

"The fraudulent transactions represent about 230 basis points of the bank's risk-weighted assets as of 31 December 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 per cent common equity tier 1 (CET1) ratio by March 31, 2019," Moody's said.

Moody's said the review for downgrade will focus on: the timing and quantum of the financial impact of the fraudulent transactions; any management actions taken to improve the capitalisation profile of the bank, and any punitive actions taken by the regulator on the bank.

"Moody's assumes a very high probability of government support for PNB in times of need, resulting in a three-notch uplift to its deposit and issuer ratings from its BCA. In the review for downgrade, Moody's will also assess government support for the bank's deposits and senior unsecured debt."

Given the review for downgrade, Moody's said it is unlikely to upgrade PNB's ratings over the next 12-18 months.

"Nevertheless, Moody's could affirm the ratings, if the financial impact of the fraudulent transactions is much smaller than what Moody's anticipates in this rating action, and/or if the bank manages to strengthen its capital position to a level above the minimum regulatory requirements -- including the capital conservation buffer -- under Basel III standards, and/or the bank returns to profitability on a sustainable basis," the statement added.