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Singapore: Fitch Ratings has placed Punjab National Bank’s (PNB) Viability Rating of ‘bb’ on Rating Watch Negative (RWN), following the large fraud reported by PNB. Fitch will resolve the Rating Watch once more clarity emerges on the extent of control failures and the impact on PNB’s financial position.

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-‘.

A full list of rating is included at the end of this rating action commentary.

KEY RATING DRIVERS
VIABLITY RATING

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 amounting to USD 1.8 billion. While the exact financial impact from this event is still being ascertained, it has raised questions on both internal and external risk controls as well as 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 financial year to December 2018 PNB’s non-performing loan (NPL) ratio eased to 12.1% (12.5% FYE17) while its CET1 ratio improved to 8.05% (7.9%). Profitability continued to be weak but the bank raised INR50 billion (USD770 million) in fresh equity from the capital markets in 3QFY18. PNB is also likely to get an additional INR54 billion (USD850 million) from the government by end-March 2018 under the government’s recapitalisation agenda.

However, this recent fraud event has been a setback for the bank in its reputation and has had a capital market impact.]

RATING SENSITIVITIES
VIABILITY RATING

Fitch will look to resolve the RWN once clarity emerges on the extent of control failures within PNB and how management plans to address them. Significant control failures that attract substantial management time to rectify would be likely to weaken our view of risk appetite and management, and result in a downgrade of the VR.

In addition, the agency will monitor PNB’s full liability, potential recoveries and the extent of additional fresh capital from both internal and external sources (eg government) to determine if the bank’s financial position is no longer consistent with the current VR.

PNB’s other ratings are unaffected by this action and are as follows:
– Long-Term IDR at ‘BBB-; Outlook Stable
– Short-Term IDR at ‘F3’
– Support Rating at ‘2’
– Support Rating Floor at ‘BBB-‘