Global rating agencies Moody’s and Fitch on Tuesday placed scam-hit Punjab National Bank under close watch and warned of a potential downgrade.
“Moody’s Investors Service has today placed under review for downgrade Punjab National Bank’s local and foreign currency deposit rating of Baa3/P-3 and foreign currency issuer rating Baa3,” it said in a statement on Tuesday, adding that the likely financial impact of the fraudulent transactions is the key driver for the review.
Similarly, Fitch Ratings also placed viability rating (VR) of ‘bb’ on rating watch negative.
“Fitch will resolve the rating watch once more clarity emerges on the extent of control failures and the impact on PNB’s financial position,” it said.
The move comes a week after state-run PNB reported an ₹11,400-crore fraud to the stock exchanges, which is the biggest in the country’s banking history.
“This recent fraud event has been a setback for the bank in its reputation and has had a capital market impact,” Fitch noted, adding that significant control failures that attract substantial management time to rectify would also weaken its view of risk appetite and management, and result in a downgrade of the VR.
Viability rating measures creditworthiness of a financial institution and reflects the likelihood of the entity to fail, as per Fitch’s rating criteria.
“We believe that the state’s propensity to provide extraordinary support to PNB remains high, subject to the sovereign’s ability, which is captured in India’s sovereign rating of BBB-,” it further said.
PNB is expected to get capital infusion of about ₹5,400 crore this fiscal.
Meanwhile, Moody’s said that PNB’s capital position would deteriorate markedly and fall below the minimum regulatory requirement if the bank has to provide for the entire exposure. It may also need to raise more capital externally, mainly from the government.
It has also placed PNB’s baseline credit assessment and adjusted BCA of Ba3 and counter-party risk assessment of Baa3(cr)/P-3(cr) under review for downgrade.
Further, 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.
“Given the review for downgrade, Moody’s will unlikely upgrade PNB’s ratings over the next 12-18 months,” it added.