Moody’s downgrades PNB

Moody’s Investors Service has downgraded Punjab National Bank (PNB) from ba3 to ba1 after the completion of a rating review started after the bank was hit by letters of undertaking (LoU) scam.

The rating agency lowered the local and foreign currency deposit rating of PNB to Ba1/NP from Baa3/P-3 and baseline credit assessment (BCA) and Adjusted BCA to b1 from ba3.

“These actions complete Moody’s review of the bank’s ratings initiated on 20 February, 2018, following the bank’s announcement of the discovery of some fraudulent and unauthorised transactions amounting to ₹144 billion ($2.2 billion) in February and March 2018,” Moody’s said.

The downgrade reflects the negative impact of fraud on the bank’s standalone profile, particularly its capital position.

It also reflects the weak internal controls and processes of the bank, given that the fraudulent transactions were undetected for a number of years, it said.

PNB reported ₹13,400-crore loss in the January-March period — the highest quarterly loss by any Indian bank ever.

Weak earning profile

“The bank’s weak earnings profile — as seen by its large stock of non-performing 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,” Moody’s said adding the provisions for the fraud will offset the benefit the bank would get from the government’s capital infusion. Moody’s expects PNB to receive capital support from the government and that it will be able sell some non-core assets to raise funds.

Moody’s said PNB will require external capital of about ₹12-₹13,000 crore.