Rating Agencies Put PNB On ‘Rating Watch’
Rating agencies will give a final assessment on PNB’s rating after liability amount becomes clear
Three top rating agencies have put Punjab National Bank on ‘rating watch’ as they await clarity on the impact of a fraud detected at the bank. Last week the bank disclosed that fraudulent ‘Letters of Undertaking’ through the PNB systems, based on which other banks had loaned $1.77 billion. This amount, the veracity of which is currently under investigation, is a contingent liability for PNB.
In its rating note, Moody’s Investor Service said that the final pay out and impact would be determined by regulators and courts, but the bank may need to provide for atleast a part of this exposure.
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.Moody’s Investor Service
Moody’s added that the fraudulent transactions represent about 230 basis points of the bank's risk-weighted assets as of December 31, 2017. As such, the bank’s capital position would fall below the regulatory requirements if the bank has to provide for the entire exposure. As of December end, the bank’s capital adequacy ratio stood at 11.58 percent.
Fitch Ratings expressed a similar view and added that the fraud has raised questions on the internal and external risk controls at the bank. Fitch noted that PNB’s asset quality and capital parameters continue to be weak, even though they have shown some stability since June 2017.
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.Fitch Ratings
Fitch, however, added that it expects the government to continue supporting the bank and this is captured in the bank’s BBB- rating.
CRISIL, too, has put PNB on rating watch. It said that it is seeking clarity on timeline and the quantum of the contingent liability for PNB, following the detection of the fraud.
The bank on its part has sought to reassure investors. In a statement issued to stock exchanges on Monday PNB said that the bank “has enough assets to meet any liability which is decided as per law."
Shares of PNB closed flat on Tuesday after declining sharply after the disclosure of the fraud.