Nirav Modi scam to damage PNB in more ways than one; 25% hit on book projected by FY20

NEW DELHI: While high-profile arrests in connection with the Rs 11,400 crore fraud in Punjab National BankBSE 0.47 % (PNBBSE 0.47 %) are making news, analysts and nosy investors are counting the potential hit of the PSU lender’s adjusted book.

Some estimates show the bank could see up to 25 per cent cut in FY20 projected book.

The PNB management confirmed in an analyst that the Rs 11,300 crore was the outstanding letter of undertakings (LoUs), and not transaction volume of the LoUs issued in last seven years. Besides, PNB has a Rs 1,700 crore fund/non-fund-based exposure to Mehul Choksey’s Gitanjali Group.

With Gitanjali GemsBSE -9.85 % deciding to shut down operations, PNB’s total exposure to this mess could exceed Rs 13,000 crore.

Diamond merchant Nirval Modi claims the amount involved was far less. In a letter to PNB, he said: “despite ‘my offer’, your actions have destroyed my brand and the business and have now restricted your ability to recover all the dues leaving a trail of unpaid debts.”

The impact on PNB’s book should come not only from the writeoffs from this account, but also subsequent dilutions at low prices, Nomura India said in an analysis. “We estimate PNB’s adjusted FY20 book to fall by 15-25 per cent, assuming a Rs 7,000-13,000 crore writeoff relating to this situation,” the global brokerage said after running a sensitivity analysis on PNB’s book valuations for each of Rs 7,000 crore, Rs 10,000 crore and Rs 13,000 crore in write-offs.

Rating agencies have already put the lender’s ratings under review.

Moody’s Investors Service on Tuesday put PNB’s local and foreign currency deposit rating of Baa3/P-3 and foreign currency issuer rating Baa3 under review for a downgrade. Fitch Ratings has placed the lender’s Viability Rating of ‘bb’ on Rating Watch Negative (RWN), following the biggest heist of public money.

Nomura India estimates that the fraud could increase PNB’s capital requirement by Rs 5,000-10,000 crore. Morgan Stanley pegged the additional capital requirement of the bank at Rs 8,000 crore assuming all the liability from the fraud, reports suggested.

Fitch said the government’s propensity to provide extraordinary support to PNB remains high. The agency, though, said it would monitor PNB’s full liability, potential recoveries and the extent of additional fresh capital from both internal and external sources.

PNB was supposed to be one of the eight public sector banks that were to raise capital from the market as part of the government’s Rs 2.11 lakh crore recapitalisation plan. These banks have already got approvals from the finance ministry. PNB was, in fact, supposed to be the first PSU lender to hit the market to raise Rs 5,000 crore.

The PNB management claims it has “a lot of resources and non-core assets at its disposal to help it get out of this problem.” The lender expects to return to normalcy within six months from now.

The PNB stock has lost 28 per cent of value since the scam broke on February 12, 2018. But the stock still trades at 0.7-0.75 times FY20 adjusted book, which is in line with better banks such as SBI (0.7 times) and Bank of BarodaBSE 0.59 % (0.8 times).

India’s premier investigating agency CBI has arrested the president (finance) of Nirav Modi’s Fire Star Diamond, Vipul Ambani, on Tuesday, along with four other senior executives.