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Nirav Modi scam: Moody’s, Fitch warn PNB of downgrades

International rating agencies Moody’s Investor Service and Fitch Ratings warned the scam-hit Punjab National Bank (PNB) of rating downgrades, citing likely networth erosion and widening losses at the second largest state-run lender.

The Rs 11,400-crore fraud–the biggest in the countrys banking history–has raised questions on both internal and external risk controls at PNB as well as the quality of management supervision at the regulatory level considering that the fraud went undetected for several years, the agencies said.

Moody’s in a note said the review for downgrade will focus on: (1) the timing and quantum of the financial impact of the fraudulent transactions, (2) any management actions taken to improve the capitalization profile of the bank, and (3) any punitive actions taken by the regulator on the bank.

It has also placed PNBs baseline credit assessment and adjusted BCA of Ba3 and counterparty risk assessment of Baa3(cr)/P-3(cr) under review for downgrade.

“The primary driver for rating action is the risk of weakening standalone credit profile of PNB, as a result of a number of fraudulent transactions” through fake letters of undertakings issued by the bank to other lenders worth USD 1.8 billion over the past many years, Moody’s said.

On the other hand, rival agency Fitch in a separate note said it has placed the bank on rating watch negative, reflecting a possibility of downgrade following the fraud.

“Fitch Ratings has placed PNB viability rating of bb on rating watch negative, following the large fraud reported by PNB,” the US-based agency said.

Viability rating measures credit worthiness of a financial institution and reflects the likelihood of the entity to fail, as per Fitchs rating criteria.

The scam came out into the open on 14 February 2018, when the state-run bank informed the stock exchanges.

“These fraudulent transactions represent a contingent liability and the financial impact will be determined by the relevant laws. Nevertheless, we expect PNB will have to provide for at least a substantial portion of the exposure.

“As a result, its 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,” Moodys said, adding these fraudulent transactions represent about 230 bps of the banks risk-weighted assets as of December 2017.

As such, its capital position would deteriorate markedly, and fall below minimum regulatory needs, if the bank is required to provide for the entire exposure, it said, adding as a result, PNB may need to raise capital externally to comply with the Basel III requirement of 8 per cent core equity by March 2019, which as of December 2017 stood at a precarious 8.05 per cent.

The agency also noted that since the scam came out into the open, PNBs share price has fallen by about 40 per cent, limiting its access to the equity capital markets.

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