Moody's cuts Punjab National Bank's deposit ratings, outlook stable

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SME Times News Bureau | 21 May, 2018
Moody's Investors Service has downgraded the local and foreign currency deposit rating of multi-crore fraud hit Punjab National Bank (PNB) to Ba1/NP from Baa3/P-3, a statement said here on Monday.

At the same time, Moody's has downgraded the bank's baseline credit assessment (BCA) and Adjusted BCA to b1 from ba3.

"These actions complete Moody's review of the bank's ratings initiated on February 20, 2018, following the bank's announcement of the discovery of some fraudulent and unauthorised transactions amounting to Rs 144 billion ($2.2 billion) in February and March 2018," the statement said.

Moody's has also downgraded PNB's foreign currency issuer rating to Ba1 from Baa3. And, Moody's has downgraded the Counterparty Risk Assessment (CRA) of the bank to Ba1(cr)/NP(cr) from Baa3(cr)/P-3(cr).

However, Moody's maintained the "ratings outlook" of the bank as "stable".

The downgrade of the bank's BCA and ratings reflects the negative impact of the discovery of a number of fraudulent transactions on the bank's standalone profile, particularly its capital position. The rating downgrade also reflects the weak internal controls and processes of the bank, given that the fraudulent transactions were undetected for a number of years, the statement said.

"The bank's weak earnings profile -- as seen by its large stock of nonperforming loans (NPLs) and the associated credit costs -- will limit its ability to absorb the impact of the fraudulent transactions over the next 12-18 months. Furthermore, provisions relating to the fraudulent exposures will largely offset the benefit the bank will receive from the Indian government's (Baa2 stable) capital infusion plan," said Moody's.

Punjab National Bank posted a net loss of Rs 13,417 crore for the fourth quarter (January-March) of 2017-18. The company had posted a net profit of Rs 262 crore for the corresponding quarter in 2016-17.

The gross non-performing assets (NPA) of the company stood at 18.38 per cent for the fourth quarter of 2017-18 compared to 12.53 per cent during the corresponding quarter in 2016-17.

The bank has made provisions and contingencies worth Rs 20,353.10 crore for the fourth quarter while it was Rs 4,466.68 crore for the October-December quarter of 2017-18.

On February 14, 2018, PNB announced to the stock exchange that it had discovered some fraudulent and unauthorized transactions amounting to Rs 113.9 billion ($1.7 billion). Based on the bank's subsequent announcements, PNB's total exposure to these transactions amounts to Rs 144 billion ($2.2 billion).

The Enforcement Directorate has already issued summons to absconding diamantaire Nirav Modi's father Deepak Modi, sister Purvi Mehta and her husband Mayank Mehta as part of its probe in the multi-crore PNB fraud.

Moody's expects that PNB will receive capital support from the Indian government and that the bank will be able to release some capital from the sale of its non-core assets - such as its real estate holdings - as well as a partial stake sale in its listed housing finance subsidiary, PNB Housing Finance Limited. Nevertheless, these sources will unlikely prove sufficient to restore the bank's capitalisation to levels before the fraudulent transactions were discovered.

While the Indian government has budgeted an infusion of Rs 650 billion into the country's 21 public sector banks, Moody's expects that the large capital shortfall will negatively impact PNB's ability to grow its loan book over the next year.

As the second largest public sector bank in India by total deposits, the systemic importance of PNB is very high and Moody's expects that the government will provide extraordinary support to the bank's creditors and depositors when required.

PNB stocks were trading at Rs 77.55 per share in the BSE, up 3.75 per cent at 2.15 pm on Monday.