Credit ratings agencies downgrade Punjab National Bank following huge Q4 loss

PNB [File] PNB last week reported a massive loss of Rs 13,417 crore in the fourth quarter | Reuters

At least three credit rating agencies have downgraded ratings of Punjab National Bank in the wake of the record fourth quarter loss that the state-owned lender reported recently, following the alleged fraud by Nirav Modi.

Billionaire diamantaire Nirav Modi, in connivance of a few officials of one of the bank branches, allegedly defrauded PNB to the tune of over Rs 14,000 earlier this year, which has hit the bank hard.

Following the disclosure of the fraud in February this year, international credit ratings agency Moody's initiated a review of PNB's ratings. On Monday, it said the review had been completed and downgraded the bank's local and foreign currency deposit rating to Ba1 from Baa3, while also downgrading its baseline credit assessment (BCA) and adjusted BCA to b1 from ba3.

PNB's foreign currency issuer ratings too have been downgraded to Ba1 from Baa3.

Moody's says the ratings downgrade reflects the negative impact of the frauds on the bank's standalone profile and the weak internal controls and processes. The lender last week reported a massive loss of Rs 13,417 crore in the fourth quarter.

“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 capital infusion plan,” said Moody's.

Many analysts expect PNB will receive more capital infusion from the government, and it may also sell some non-core assets, but given its huge basket of bad loans and provisioning required for the same, the additional funds may not be sufficient to fully nurse it back to health to the levels before the frauds were disclosed. PNB's gross NPAs stood at 18.38 per cent at the end of March 31, 2018, while net NPAs were at 11.24 per cent.

“Moody's estimates that PNB will require external capital of about Rs 120-130 billion (Rs 12,000-13,000 crore) in fiscal 2019 to meet the minimum Basel III CET1 ratio of 8 per cent by March 2019, including a capital conservation buffer. While the Indian government has budgeted an infusion of Rs 650 billion (Rs 65,000 crore) 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,” it said.

Apart from Moody's, India Ratings and Research has downgraded its ratings on PNB's tier II bonds and senior infrastructure bonds to AA+/Negative from AAA/Rating watch negative, while the ratings on additional tier I bonds were downgraded to A+/Negative from AA+/Negative.

CRISIL also revised its ratings on PNB to AAA (rating watch with negative implications) versus AAA (rating watch with developing implications).

“The downgrade in the long-term issuer rating reflects the impairment in PNB’s ability to sustain its current position of systemic importance, with the possibility of a dip in its overall share of systemic assets and liabilities, mirroring the sharp deterioration in its asset quality,” said Udit Kariwala, associate director at India Ratings.

Kariwala further points out that PNB’s higher share of exposure to stressed sectors such as infrastructure and iron and steel, along with sizeable single name concentration towards highly levered corporate groups, makes it more vulnerable to asset quality challenges than a few of its peers.

Since, the fraud was disclosed by the lender on February 14, PNB's stock has crashed over 46 per cent. On, Monday, it closed 4.6 per cent higher at Rs 78.20 on the BSE, mirroring a rally in stocks of a few other state-owned banks, following the sale of debt-laden Bhushan Steel to Tata Steel. The successful completion of the insolvency process of Bhushan Steel is expected to reduce the NPAs of public sector banks by about Rs 35,000 crore, according to Rajeev Kumar, secretary, department of financial services.