Rating agency Moody’s on Monday downgraded the rating for Union Bank of India (UBI) by a notch, owing to weak asset quality and inadequate loss-absorption capacity.
The move comes a day before its shareholders meet to approve a proposal on issuing fresh shares to the government and Life Insurance Corporation of India. In recent weeks, it is the third public sector bank that the rating agency has either downgraded (Bank of India) or changed its outlook for (Central Bank of India).
In the revised ratings, bank financial strength (BFSR) has been cut from ‘D+’ to ‘D’, while global local currency deposits were cut from Baa2/Prime-2 to Baa3/Prime-3.
Vice-president and senior credit officer Beatrice Woo said, “The rating action considers UBI’s weaker financial metrics, particularly its high level of troubled assets and low provision coverage, and this has pushed the bank into a lower standalone rating band.”
Though capital infusion is expected to boost the bank’s capital ratio, its loss-absorption cushion is modest, considering its deteriorating asset quality and expected growth. Tier-I capital ratio stood at 7.98 per cent at the end of December. This is slightly below the eight per cent mark that the government has mandated for public sector banks. It is also lower than that of its peers.
The government is expected to pump equity capital of Rs 1,000 crore in Mumbai-based public sector lender. Currently, the banking system’s Tier-I ratio averages 9.60 per cent.
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Other ratings that were cut include foreign currency senior debt (from Baa2 to Baa3) and the foreign currency senior medium-term note programme (from Baa2 to Baa3). However, the foreign currency long-term/short deposit rating of Baa3/Prime-3 with a stable outlook was retained.
The bank’s asset quality may weaken further, owing to the difficult operating environment.
Woo said, “When balancing these factors and its overall franchise value, the revised rating ranks UBI more appropriately, compared with other Moody’s-rated Indian mid-sized public-sector banks.”
UBI’s non-performing assets (NPAs) at end of December stood at 3.33 per cent and restructured assets accounted for 5.53 per cent of the bank’s loans. The restructured assets were more than the estimated 4.2 per cent for the system. System-based recognition of bad loans also contributed to the rise in NPAs for many banks, including UBI.
The bank’s potential credit costs could increase in the near term. Moody’s also said the bank’s provision coverage fell to 63.1 per cent in December, compared with 70.2 per cent a year earlier.
The capital infusion to increase the Tier-I capital ratio did not provide enough cushion to absorb the potentially higher credit costs resulting from the deteriorating asset quality. It also failed to support rapid growth and at the same time, retain the standalone BFSR rating of Ba1.