PNB fraud: Moody’s, Fitch warn bank of downgrades

Tribune News Service/PTI

New Delhi/Mumbai, Feb 20 

International rating agencies Moody’s Investor Service and Fitch Ratings today warned the scam-hit Punjab National Bank (PNB) of rating downgrades, citing likely networth erosion and widening losses at the second largest state-run lender.

The Rs 11,400-crore fraud — the biggest in the country’s banking history — has raised questions on both internal and external risk controls at PNB as well as the quality of management supervision at the regulatory level considering that the fraud went undetected for several years, the agencies said.

Moody’s in a note today said the review for downgrade will focus on: (1) the timing and quantum of the financial impact of the fraudulent transactions, (2) any management actions taken to improve the capitalisation profile of the bank, and (3) any punitive actions taken by the regulator on the bank.

It has also placed PNB’s baseline credit assessment and adjusted BCA of Ba3 and counterparty risk assessment of Baa3(cr)/P-3(cr) under review for downgrade.

“The primary driver for today’s rating action is the risk of weakening standalone credit profile of PNB, as a result of a number of fraudulent transactions” through fake letters of undertakings issued by the bank to other lenders worth $1.8 billion over the past many years, Moody’s said.

On the other hand, rival agency Fitch in a separate note said it has placed the bank on rating watch negative, reflecting a possibility of downgrade following the fraud.

“Fitch Ratings has placed PNB viability rating of ‘bb’ on rating watch negative, following the large fraud reported by PNB,” the US-based agency said.

Viability rating measures credit worthiness of a financial institution and reflects the likelihood of the entity to fail, as per Fitch’s rating criteria.

“These fraudulent transactions represent a contingent liability and the financial impact will be determined by the relevant laws. Nevertheless, we expect PNB will have to provide for at least a substantial portion of the exposure.

“As a result, it’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,” Moody’s said.