Fitch downgrades PNB's viability rating to 'b' from 'bb-'

Fitch Ratings today downgraded the viability rating (VR) of scam-hit Punjab National Bank to 'b' from 'bb-', and maintained it on rating watch negative (RWN).

The rating agency, however, has affirmed the bank's long-term issuer default rating (IDR) at 'BBB-' and its support rating floor and support rating at 'BBB-'and '2', respectively.

"The two-notch downgrade to PNB's VR is a reflection of the significant deterioration in its (PNB) standalone credit profile, mainly due to a drop in its core capital ratio that was bigger than our expectation," it said in a report.

The deterioration in the bank's core capitalisation was caused by a sharp increase in its non-performing loans (NPLs), including the USD 2.2 billion in fraudulent transactions reported in February 2018, and the related increase in credit costs, which resulted in large losses in the financial year ended March 2018, the agency said.

 

Gross net-performing assets (NPAs) rose to 18.38 per cent of gross advances as on March 31, 2018, against 12.53 per cent a year ago, while net NPAs also soared to 11.24 per cent, compared with 7.81 per cent.

Last month, Moody's had downgraded PNB's rating to Ba1/NP from Baa3/P-3, due to impact on it's profitability following the Nirav Modi-led over Rs 13,000 crore fraud case.

Fitch further said the RWN reflects it's expectations that the pressures, mainly relating to asset quality, earnings and profitability, will persist at least over the next few quarters.

"This could weaken its already low core capitalisation further unless the bank is able to save or generate capital through intrinsic sources such as non-core asset sales and cost reductions although there is the prospect of the government injecting further capital into the state banks," the report said.

PNB's ability to sustain, if not improve, its buffers through sources such as retained earnings, fresh equity raising and stake sales is important for its VR, Fitch said.

The agency said it will continue to focus on the bank's ability to raise a significant portion of its capital needs - independent of the government - to counter pressures on its asset quality and earnings performance, failing which further action could be taken on the bank's standalone creditworthiness.