Fitch Ratings downgraded the viability rating of Punjab National Bank to "b" from "bb-" and maintained it on Rating Watch Negative.
The rating agency said June 4 that it affirmed the Indian lender's long-term issuer default rating with a stable outlook. Its support rating floor and support rating were also affirmed at BBB- and 2, respectively.
The downgrade on the viability rating reflects the significant deterioration in its stand-alone credit profile, mainly caused by a declining core capital ratio that was bigger than Fitch's expectation. The decline was due to a surge in nonperforming loans, including US$2.20 billion in fraudulent transactions uncovered in February.
While downside risk remains, Fitch expects the bank's capital position to recover gradually.
The Rating Watch Negative placement reflects the expectation that pressures relating to asset quality, earnings and profitability will persist at least over the next few quarters.
Fitch said Punjab National Bank's viability rating reflects its weak capitalization and profitability on the back of poor asset quality. The viability rating is likely to stay at the current level if the bank limits the drop in earnings, generates substantial capital through internal sources or accesses external equity capital to rebuild its capital buffers.
Meanwhile, the issuer default rating and support rating floor reflect the view of the state's high propensity to provide extraordinary support to the bank. The stable outlook reflects Indonesia's sovereign rating.
A downgrade in the sovereign rating could lead to a similar action on the bank's support rating and issuer default rating. However, an upgrade on Indonesia's sovereign rating is not likely to lead to an upgrade on the bank's rating.
