CRISIL has revised its rating outlook on UCO Bank’s Tier I perpetual bonds and upper Tier II bonds to ‘Negative’ from ‘Stable’. The rating on the lower Tier II bonds has been reaffirmed at ‘AA/Stable’. The revision in outlook reflects CRISIL’s belief that the pressure on the bank’s Tier I capital adequacy ratio (CAR) will increase over the medium term because of banks weak earnings profile and low current Tier I CAR.

Under a capital-restructuring plan recently approved by the Government of India (GoI), UCO Bank will, over the near term, raise capital through perpetual non-cumulative preference shares (PNCPS), which qualify as Tier I capital. This will be followed by conversion of a part of GoI’s shareholding in the bank, currently at 74.98 per cent, into preference capital, and a follow-on public offer (FPO). Post the completion of the above issues, the GoI holding in the bank is expected to come very close to 51 per cent, thus limiting the flexibility available with the bank to raise additional equity capital. Further, the timing of the FPO will depend on the revival of the capital markets; the size of the issue is likely to be significantly lower than previously assumed. As on March 31, 2008, the bank reported a total CAR of 10.09 per cent, with a Tier I CAR of 5.04 per cent. The bank’s earnings profile continues to remain weak, with the net profit margin (NPM) reducing to 0.51 per cent in 2007-08 (refers to financial year, April 1 to March 31) from 0.88 per cent during 2006-07 due to increased cost of borrowings. The bank is taking steps to improve its profitability through a combination of increase in yield on advances, increase in its current and savings account base, and thrust on recoveries. The bank has also set up a high-level committee to effectively manage capital adequacy.

CRISIL believes that while the capital raising planned through the PNCPS and FPO issues will enhance the bank’s Tier I CAR in the short term, its weak profitability and modest growth plans will continue to constrain the capital adequacy in the medium term.

CRISIL’s ratings on UCO Bank’s debt programmes reflect the support that the bank is expected to receive from GoI, its majority owner, if needed; the bank’s large scale of operations across India; and its asset quality, which is on par with the industry average. These rating strengths are, however, partially offset by UCO Bank’s weakening resource profile and its impact on profitability, and by the bank’s low Tier I capital adequacy.

Outlook:Negative(for Tier I perpetual bonds and upper Tier II bonds)
UCO Bank’s capital adequacy is likely to face increasing pressure over the medium term, owing to its weakening earnings profile. While the bank plans an FPO in the near future, the timing of the FPO will depend on the revival of the capital markets; the size of the issue is likely to be significantly lower than previously assumed. Factors that can result in a revision in outlook to ‘Stable’ include significant and sustainable improvement in earnings, and increased capitalisation. Conversely, the bank’s inability to maintain its CAR well above the regulatory minimum, or significant deterioration in its asset quality, could drive a downward revision in the rating on these instruments.

Outlook:Stable(for lower Tier II Bonds)
CRISIL believes that GoI will extend support to UCO Bank and other public sector banks (PSBs) in the event of distress, and that UCO Bank will maintain its asset quality over the medium term. The outlook may be revised to ‘Positive’ if there is a large and sustainable improvement in the bank’s earnings and capital profile. Conversely, the outlook may be revised to ‘Negative’ if profitability does not improve significantly in the medium term or if there is significant deterioration in the bank’s asset quality.

About UCO Bank
UCO Bank is a large PSB, with total assets of Rs.898 billion as on March 31, 2008. It reported a profit after tax (PAT) of Rs.4.12 billion in 2007-08, as against Rs.3.16 billion in 2006-07. For the quarter ended June 30, 2008, the bank reported a PAT of Rs.1.33 billion as against Rs.1.33 billion in the corresponding period of the previous year.