Fitch Downgrades Punjab National Bank’s Viability Rating Again

International rating agency Fitch Ratings today downgraded its viability rating for Punjab National Bank for the second time in two months, following a “significant deterioration in its standalone credit portfolio, mainly due to a drop in its core capital ratio”.

Fitch cut PNB’s rating by two notches to b from bb-, saying the fall in the state-owned bank’s core capital ratio was larger than what it had estimated. The agency had earlier downgraded PNB’s viability rating to bb- from bb in April, following the Nirav Modi fraud.

“The deterioration in its core capitalisation was caused by a sharp increase in its non-performing loans, including the $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,” Fitch said in a report. “The decline also highlights management’s weaker execution and previous underwriting and oversight gaps, which the bank has already started taking steps to address,” the rating agency added.

PNB reported a net loss of Rs 13,417 crore in the quarter ended March, primarily due to higher provisions for bad loans. The bank also made provisions worth Rs 7,178.42 crore in the Nirav Modi case, which originated at the bank’s Brady House branch. The bank will set aside a similar amount as further provisions against the case during the current financial year. The bank’s gross non-performing asset ratio as on March 31 stood at 18.38 percent, as compared with 12.11 percent in the previous quarter.

The rating agency maintained its negative rating watch on PNB due to pressures, mainly relating to asset quality, earnings and profitability, which will persist at least over the next few quarters, it said. This could weaken its already low core capitalisation further. That’s unless the bank is able to save or generate capital through intrinsic sources such as non-core asset sales and cost reductions, besides the prospect of further capital injection from the government into state-owned banks.

“Fitch 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,” it said in its statement.