Global rating agencies Moody’s and Fitch have placed state owned Punjab National Bank under review for downgrade as they await clarity on the impact of fraud on the lender’s financial position. Moody’s Investors Service said that that the primary driver for Tuesday’s rating action is the risk of weakening of the bank’s standalone credit profile, as a result of the discovery of a number of fraudulent transactions.
It has placed under review for downgrade Punjab National Bank’s (PNB) local and foreign currency deposit rating of Baa3/P-3 and foreign currency issuer rating Baa3. The rating agency said that it is unlikely to upgrade PNB’s ratings over the next 12-18 months.
The fraudulent transactions represent a contingent liability and the financial impact will be determined by the relevant law in India. Nevertheless, Moody’s expects that PNB will need to provide for at least a substantial portion of the exposure. As a result, the bank’s profitability will likely come under pressure, although the actual impact will depend on the timing and quantum of provisions that need to be made, as well as any prospects for recovery said Moody’s.
The fraudulent transactions represent about 230 basis points of the bank’s risk-weighted assets as of 31 December 2017. As such, PNB’s capital position would deteriorate markedly, and fall below minimum regulatory requirements, if the bank is required to provide for the entire exposure. Consequently, PNB may need to raise capital externally — mainly from the government — to comply with the minimum Basel III capital requirement of an 8 per cent common equity tier 1 (CET1) ratio by March 31, 2019. The bank reported a CET1 ratio of 8.05 per cent in the quarter ended December 31, 2017.
“At this stage, Fitch 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-’, Fitch further said.
PNB, PSU bank stocks close in green
Meanwhile, PNB and other PSU bank stocks stopped bleeding further and closed in the green after a volatile trading session while private banks close in the red as traders approach F&O expiry on February 22. The PNB stock was volatile throughout the day reacting on news flows from rating agencies as well as the ongoing investigation and searches but in the end closed flat, up 0.13 per cent at Rs 116.55 on both BSE and NSE.
Other PSU Bank stocks recovered after four days of decline. The top gainers on NSE included Syndicate Bank (4.68 per cent), Bank of India (4.00 per cent), IDBI Bank (3.83 per cent), Indian Bank (3.62 per cent), Oriental Bank of Commerce (2.30 per cent), Allahabad Bank (1.07 per cent), Bank of Baroda (0.42 per cent), SBI (0.37 per cent).
“There was value buying in the PSU banks as they were oversold, resolution of Bhushan Steel debt means Rs 35,000 crore will flow into PSU banks, SBI and Bank of Baroda will be major beneficiaries along with other banks,” said Kishore P Ostwal, chairman and managing director, CNI Research.