Standard & Poor's Ratings Services has affirmed its 'BBB-' long-term rating on Union Bank of India (UBI) on expectations that the government will infuse capital into the lender.
"The affirmed rating reflects UBI's sound funding and liquidity positions and a very high likelihood of support from the government of India," S&P said in a statement. It retained the outlook on bank at stable.
The US-based agency said it expects the government to provide "timely and sufficient extraordinary support" to the bank if it comes under financial distress.
It anticipates UBI's asset quality to remain stressed over the next 12 months as the pickup in the economy and debottlenecking is likely to be gradual.
The corporate and small and mid-sized enterprises segments have come under higher stress than the retail segment in the current business cycle. "UBI's higher exposure to these segments could weaken its asset quality," it said.
The bank's nonperforming loans (NPL) ratio increased to 7.1 per cent as of December 31, from 3 per cent on of March 31, 2013.
UBI has been able to remain profitable in December quarter unlike some of its peers. "We anticipate that UBI's profitability will remain modest, and the government will continue to infuse capital into the bank," S&P said.
The stable outlook reflects our expectation that UBI will calibrate its growth to maintain its current capitalization over the next 12 months.
The agency could downgrade UBI if the bank can't raise sufficient capital to support growth, its profitability deteriorates sharply, or the economic risk of India rises; or asset quality deteriorates such that its gross NPLs increase to more than 10%-12% of total loans or stressed assets increase to 18%-20% of total loans.
"The bank's inability to raise sufficient capital, such that it breaches the regulatory capital requirement, could lead to multiple notches of downgrade," it said.
Hit by mounting bad loans, many leading PSU banks like Bank of India and IDBI have reported highest ever quarterly losses totalling over Ra 12,000 crore, while banking major like SBI and PNB have reported sharp erosion in profits in December quarter.
