Fitch Ratings Downgraded PNB due to the Recent Credit Fraud

Fitch Ratings downgraded viability rating of fraud-hit Punjab National Bank (PNB), citing significant deterioration in its credit profile and oversight gaps.

The viability rating (VR) has been downgraded to ‘b’ from ‘bb-’ and maintained on ‘rating watch negative’ (RWN).

“The two-notch downgrade to PNB’s VR is a reflection of the significant deterioration in its standalone credit profile, mainly due to a drop in its core capital ratio that was bigger than Fitch’s expectation,” the rating agency said in a statement.

VRs represent the capacity of the bank to maintain ongoing operations and to avoid failure. The deterioration in its core capitalisation was caused by a sharp increase in its non-performing loans (NPLs), including the $2.2 billion in fraudulent transactions reported in February 2018, and the related increase in credit costs, which resulted in large losses in the financial year ended March 2018 (FY18).

“The decline also highlights management’s weaker execution and previous underwriting and oversight gaps, which the bank has already started taken steps to address,” Fitch said.

The RWN reflects Fitch’s expectations that the pressures, mainly relating to asset quality, earnings and profitability, which will persist at least over the next few quarters.

“This could weaken its already low core capitalisation further unless the bank is able to save or generate capital through intrinsic sources such as non-core asset sales and cost reductions although there is the prospect of the Government injecting further capital into the state banks,” Fitch said.

The viability rating reflects PNB’s weak capitalisation and profitability due to poor asset quality. PNB’s earnings were affected by high credit costs and the one-off expensing of its pension and gratuity liabilities in fourth quarter of last fiscal, Fitch said.

Nonetheless, PNB’s standalone credit profile continues to benefit from its robust funding and stable liquidity, a result of its strong domestic deposit franchise, it added. Fitch, however, affirmed PNB’s long-term issuer default rating (IDR) at ‘BBB-’, with a stable outlook. It expects PNB’s capital position to recover gradually, but downside risk remains. Ongoing efforts at rationalising risk density (risk-weighted assets to total assets) and planned non-core asset sales are likely to play an important role.

“We expect a recovery in earnings to be handicapped by elevated credit costs, with potential for further deterioration. The resolution of some of the large NPL accounts during the course of the year, not our base case, presents the possibility of positive surprises in its earnings and asset-quality performance,” it said.

However, if PNB is unable to generate adequate resources on its own to support core capitalisation, that could impinge further on its standalone ratings as the bank is currently in breach of at least three separate risk thresholds of the Reserve Bank of India’s prompt corrective action framework, Fitch added.