Fitch Downgrades PNB’s Viability Rating

Fitch Ratings cut Punjab National Bank Ltd.'s viability rating—a measure of its intrinsic creditworthiness—saying the more than Rs 13,000-crore fraud at India's second-largest public sector lender will hurt its earnings and core capital.

The rating agency downgraded it to ‘bb-' from ‘bb', keeping it at ‘rating watch negative', it said in a press release. The downgrade mirrors the bank's risk controls which are “weaker” than Fitch anticipated. It, however, doesn't affect PNB's other ratings.

Jewellers Nirav Modi and his uncle Mehul Choksi's firms obtained loans from overseas branches of Indian banks based on fraudulent guarantees allegedly obtained in connivance with some of the employees at a Mumbai branch of PNB. The bank has agreed to honour 352 such guarantees—called letters of undertakings— worth Rs 6,500 crore maturing with seven banks on or before March 31.

The fraud will act as a drag on the lender's overall credit profile over the next two years, adding to the bank's non-performing loans and credit costs, Fitch said. Provisioning requirements will too go up, it said.

Also Read: RBI Allows PNB To Spread Losses Over Four Quarters

Fitch expects the bank to report losses till the end of year through March 2019. Profitability, however, may improve faster than expected if some of the non-performing accounts are resolved during the course of the year, it said.

The government had allocated Rs 5,473 crore for PNB for the  year ended March as part of its Rs 2.11-lakh crore recapitalisation plan. Potential losses from the fraud will largely consume the capital infusion, putting pressure on the bank's capital buffer over the medium term, Fitch said. It's important for PNB to maintain the buffer using other means like fresh equity raising or stake sale to maintain its viability rating, the agency said.

Fitch didn't rule out the chances of a further downgrade if the bank's earnings and core capitalisation deteriorate more than expected, as this would further increase the need for capital to maintain buffers.

The rating agency is also not optimistic about an early resolution to the fraud. “Fitch is uncertain whether PNB's management will be able to address the fraud quickly, due to the involvement of various investigative agencies,” the agency said. “A delay may affect recoveries, creating more capital demand.”

While Fitch maintained the bank's support rating—a measure of the likelihood of a bank receiving extraordinary support—unchanged owing to the lender's “high systemic importance”.

Also Read: PNB's Sunil Mehta Says Will Be Out Of Nirav Modi Fraud Case In 6 Months