Mumbai, Jun 4 (IANS): Fitch Ratings has downgraded the viability rating (VR) of state-owned Punjab National Bank (PNB) to 'b' from 'bb-' and maintained it on rating "watch negative" (RWN).

"The two-notch downgrade to PNB's VR is a reflection of the significant deterioration in its standalone credit profile, mainly due to a drop in its core capital ratio that was bigger than Fitch's expectation," the agency said in a statement on Monday.

"The deterioration in its core capitalisation was caused by a sharp increase in its non-performing loans (NPLs), including the $2.2 billion in fraudulent transactions reported in February 2018, and the related increase in credit costs, which resulted in large losses in the financial year ended March 2018 (FY18)."

"The decline also highlights management's weaker execution and previous underwriting and oversight gaps, which the bank has already started taking steps to address."

According ot the agency, the RWN reflects its expectations that the "pressures, mainly relating to asset quality, earnings and profitability, will persist at least over the next few quarters".

"This could weaken its already low core capitalisation further unless the bank is able to save or generate capital through intrinsic sources such as non-core asset sales and cost reductions although there is the prospect of the government injecting further capital into the state banks," the statement said.

As per the statement, PNB's ability to sustain, if not improve, its buffers through sources such as retained earnings, fresh equity raising and stake sales is important for its VR.

However, PNB's "Long-Term Issuer Default Rating" (IDR) has been affirmed at 'BBB-' and its "Support Rating Floor and Support Rating" at 'BBB-'and '2', respectively.

"The Outlook on the IDR is Stable... PNB's IDR is at its Support Rating Floor of 'BBB-' and reflects our view of the state's high propensity to provide extraordinary support to PNB," the statement added.