PNB scam: Fitch places bank's rating under watch with negative implications

The move could lead to a possible downgrade for Punjab National Bank, India's second-largest public-sector bank

Following the revelation of the Rs 114-billion fraud at Punjab National Bank, global rating agency Fitch has placed the lender's viability under rating watch with negative (RWN) implications. This could lead to a possible downgrade.

Fitch will resolve the rating watch after more clarity emerges on the extent of control failures and the impact on PNB's financial position.

The RWN reflects the possibility of a downgrade of PNB's viability rating, following the detection of a large fraud in one of the bank's branches.

At this stage, it does not view this event to have an impact on PNB's support rating floor (BBB-) due to the bank's high systemic importance as the second-largest state-owned bank.

"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-'", the agency said in a statement.

While the exact financial impact from this event is still being ascertained, it has raised questions on both internal and external risk and the quality of management supervision, considering that the fraud went undetected for several years.

PNB's asset quality and capital parameters continue to be weak but have shown some stability since Fitch's rating action in June 2017. For the nine months of the financial year to December 2018 PNB's non-performing loan (NPL) ratio eased to 12.1 per cent (from 12.5 per cent estimated for FY17).

Its CET1 ratio improved to 8.05 per cent from 7.9 per cent. Profitability continued to be weak but the bank raised Rs 50 billion ($770 million) in fresh equity from the capital markets in the third quarter of FY18. PNB is also likely to get an additional Rs 54 billion ($850 million) from the government by the end of March 2018 under the government's recapitalisation plan.