Fitch places PNB on 'Rating Watch Negative', may downgrade

New Delhi, Feb 20 : Fitch Ratings has placed Punjab National Bank's (PNB) Viability Rating of 'bb' on Rating Watch Negative (RWN), following the $1.8 billion fraud detected in the bank, an official statement said here on Tuesday.

Fitch clarified that it would resolve the Rating Watch once more clarity emerges on the extent of control failures and the impact on PNB's financial position.

"At this stage, Fitch does not view this event 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-'," Fitch said.

PNB, the second largest public sector bank in India, has detected a $1.8 billion fraud in one of its branches in Mumbai, which is being investigated by the Central Bureau of Investigation and the Enforcement Directorate.

The amount of fraudulent transactions is equivalent to eight times the bank's net income of about Rs 1,320 crore ($206 million).

"The RWN reflects the possibility of a downgrade of PNB's Viability Rating following the detection of a large fraud in one of the bank's branches amounting to $1.8 billion. While the exact financial impact from this event is still being ascertained, it 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," the rating agency said.

Fitch said it would 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 (VR)," it said.

"In addition, the agency will monitor PNB's full liability, potential recoveries and the extent of additional fresh capital from both internal and external sources (like government) to determine if the bank's financial position is no longer consistent with the current VR," Fitch added.