Union Bank's elevated credit costs, bad loans to hit capital position: S&P

Weak performance in FY19 on expected lines

Union Bank of India's elevated credit costs and provisions for bad loans will continue to weigh on its earnings profile, adversely impacting capital position, said global rating agency Standard and Poor's.

The public sector lender posted a sharp rise in net loss in the fourth quarter of the year ended March 2019 (Q4FY19) on higher provisions as the Reserve Bank of India asked it to reclassify non-performing assets (NPAs) from back date.

The bank's reported coverage ratio for NPAs has improved to 58 per cent as on March 31, 2019, from 51 per cent a year ago. But, Union Bank will have to further step up on the provisioning, S&P said in a statement.

The bank had to increase its provisioning in Q4FY19 after the RBI determined a Rs 2,280-crore shortfall for provisioning against NPAs. The higher provisions were required for the bank to take necessary haircuts on non-performing loans.

It may have to take large haircuts on some of the loans where recoveries are likely to be low. This excludes loans to steel and cement units, which are backed by hard assets and a favorable commodity cycle.

The weak results of the bank, which carries rating of BB+/Stable/B, were in line with S&P Global Ratings' expectations. The bank posted its second consecutive annual loss of Rs 2,950 crore in FY19 on account of high provisions and lower noninterest income, lower. It had booked the loss of Rs 5,250 crore in FY18. The weak results are also commensurate with the bank's stand-alone credit profile of 'bb'.

On further capitalisation of Union Bank, S&P said "given that raising capital from the market will be challenging due to weak equity valuations, we expect further capital support from the government".

Its capital adequacy ratio was 11.78 per cent with Common Equity tier I (CET-1) stood at 8.02 per cent in March 2019.

The government injected a capital of Rs 4,100 crore in FY19 and Rs 4,500 crore in FY18. "We believe the bank will require capital in FY20 as well to increase its provision coverage ratio and ensure compliance with minimum capital requirements," it added.