PNB Rs 11,000-crore fraud fallout: Fitch places bank on 'Rating Watch Negative' with downgrade possibility

New Delhi: Fitch on Tuesday placed Punjab National Bank on ‘Rating Watch Negative’ (RWN), reflecting a possibility of downgrade following the $1.77 billion fraud. The fraud – the biggest ever in the banking history – 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, it said. “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,” the US-based agency said in a statement. The Viability Rating measures credit worthiness of a financial institution and reflects the likelihood of the entity to fail, as per Fitch. The RWN reflects the possibility of a downgrade of PNB’s Viability Rating. PNB last week said it has detected fraudulent transactions of $1.77 billion (Rs 11,400 crore) in one of its branches in Mumbai. “Fitch will resolve the Rating Watch once more clarity emerges on the extent of control failures and the impact on PNB’s financial position,” it added. [caption id=“attachment_4350781” align=“alignleft” width=“380”]  Representational image. AFP[/caption] Stating that the fraud event has been a setback for the bank in its reputation and has had a capital market impact, Fitch said it will monitor PNB’s full liability, potential recoveries and the extent of additional fresh capital from both internal and external sources to determine if the bank’s financial position is no longer consistent with the current viability rating. 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 April-December period of 2017-18, PNB’s non-performing loan (NPL) ratio eased to 12.1 per cent. Profitability continued to be weak but the bank raised Rs 5,000 crore in fresh equity from capital markets in the third quarter of FY2018. PNB is also likely to get an additional Rs 5,400 crore from the government by end-March 2018 under the government’s recapitalisation agenda. 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 viability rating,” Fitch said. The rating agency, however, said that the fraud event is unlikely 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-’,” it added.