Moody’s Downgrades PNB Over ‘Negative Impact’ of Nirav Modi Fraud

The downgrade reflects the weak internal controls of the bank due to years of undetected fraudulent transactions.

International rating agency Moody's on Monday, 21 May, said it has downgraded state-run Punjab National Bank's (PNB) rating to Ba1/NP from Baa3/P-3, due to impact on the lender's profitability following Nirav Modi-fraud case.

It kept the ratings outlook as stable but also downgraded the bank's baseline credit assessment (BCA) and Adjusted BCA to b1 from ba3.

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 agency said in a report in New Delhi

The downgrade also reflects the weak internal controls and processes of the bank, given that the fraudulent transactions were undetected for a number of years.

In February, the bank announced that it had discovered some fraudulent and unauthorised transactions amounting to Rs 11,390 billion (USD 1.7 billion).

Based on the bank's subsequent announcements, PNB's total exposure to these transactions amounts to Rs 14,400 crore (USD 2.2 billion).

Following the announcement of the fraudulent transaction, Moody's initiated a review of the bank's ratings on 20 February 2018, which is now complete.

The rating agency expects that the lender will receive capital support from the government and that it 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.

"Nevertheless, these sources will unlikely prove sufficient to restore the bank's capitalisation to levels before the fraudulent transactions were discovered," the report said.

The report estimates that PNB will require external capital of about Rs 12,000-13,000 crore in FY2019 to meet the minimum Basel III CET1 ratio of 8 percent by March 2019, including a capital conservation buffer.

This estimate takes into account the ageing basis provisions for the non-performing loans (NPLs), the deferred provisions for the fraud, investment losses and employee benefit expenses as well as a reduction in risk weighted assets, it said.

The report said while the government has budgeted an infusion of Rs 65,000 crore into 21 public sector banks, it expects that the large capital shortfall will negatively impact PNB’s ability to grow its loan book over the next year.

The rating agency, however, said it will downgrade PNB's BCA and ratings if the bank's capitalisation worsens beyond what it's expects in this ratings action.

Any indication that government support to the bank has diminished will also lead to a ratings downgrade, it added.

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