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Moody's downgrades Punjab National Bank on negative impact of US$2B fraud

Moody's downgraded the ratings of India-based Punjab National Bank due to negative impact from the discovery of more than US$2 billion of fraudulent transactions earlier this year and the state-run bank's weak internal controls and processes.

The rating agency lowered the local- and foreign-currency deposit rating of Punjab National Bank to Ba1/NP from Baa3/P-3. At the same time, Moody's downgraded the bank's baseline credit assessment and adjusted BCA to "b1" from "ba3," its foreign-currency issuer rating to Ba1 from Baa3 and its counterparty risk assessment to Ba1(cr)/NP(cr) from Baa3(cr)/P-3(cr).

The outlook is stable.

The action concludes Moody's review of the bank's ratings initiated on Feb. 20 following the bank's announcement of the discovery of fraudulent and unauthorized transactions amounting to approximately US$2.2 billion in February and March.

While Punjab National Bank is likely to receive capital support from the government, sale of noncore assets and a partial stake sale in PNB Housing Finance Ltd., Moody's said it does not see these sources sufficient to restore the bank's capitalization to levels before the fraud was discovered. The fraudulent transactions represented 320 basis points of the bank's risk-weighted assets as of March.

The rating agency said it estimates the bank will require external capital of about 120 billion rupees to 130 billion rupees in fiscal 2019 to meet the minimum Basel III CET1 ratio of 8% by March 2019, including a capital conservation buffer.

While the Indian government has budgeted an infusion of 650 billion rupees into the country's 21 public sector banks, Moody's expects that the large capital shortfall will negatively impact Punjab National Bank's ability to grow its loan book over the next year.

As of May 18, US$1 was equivalent to 68.02 Indian rupees.