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Moody's, Fitch place Punjab National Bank ratings under review for downgrade

Moody's and Fitch Ratings placed the ratings of Punjab National Bank under review for potential downgrade, based on the potential weakening of the lender's credit profile due to the discovery of fraudulent transactions.

Moody's said in a Feb. 20 report that it placed under review the Indian bank's local and foreign currency deposit rating of Baa3/P-3, and foreign currency issuer rating of Baa3.

The lender's discovery of fraudulent and unauthorized transactions totaling 113.9 billion rupees represent a "contingent liability," the agency said. It expects the bank to provide for at least a substantial portion of the exposure, which could affect its profitability.

The transactions comprise about 230 basis points of the lender's risk-weighted assets as of Dec. 31, 2017, Moody's noted. This means the state-owned bank's capital position would "deteriorate markedly," and fall below minimum regulatory requirements if it provides for the entire exposure.

The lender may then need to raise capital externally to comply with minimum Basel III requirements, though its access to capital markets may have been checked by about a 30% fall in its share price as of close of business Feb. 19.

Moody's review for downgrade will focus on the "timing and quantum" of the financial impact as a result of the fraudulent transactions, potential sanctions against the bank by the regulator and management actions to improve its capitalization.

The agency will downgrade the bank's ratings if its capital position is weakened by contingent liabilities arising from the fraud, or if government support is seen to have declined beyond a certain level.

Meanwhile, Fitch placed Punjab National Bank's "bb" viability rating on Rating Watch Negative, which reflects the possibility of a downgrade to the rating.

The agency will resolve the placement when it has more clarity on the extent of control failures and their impact on the lender's finances. Fitch does not however believe the scam will affect the bank's support rating floor of BBB- due to its "high systemic importance" as the second-largest state-owned bank.

"Significant control failures" that require substantial management time to rectify would likely weaken the agency's view of risk appetite and management at the bank, and could lead to a downgrade of its viability rating.

The Indian government has asked Punjab National Bank to conduct a forensic audit into why the multibillion-rupee fraud remained uncovered from 2011 until now.

As of Feb. 19, US$1 was equivalent to 64.51 Indian rupees.