Detailed Rationale

CRISIL Ratings has revised its rating outlook on the long-term debt instrument of UCO Bank to 'Positive' from 'Stable' while reaffirming the 'CRISIL A+’ rating and has reaffirmed its ‘CRISIL A1+' rating on the short-term debt instrument.

 

The revision in outlook factors in the better-than-expected performance of the bank in the past few quarters. Asset quality has improved with reported gross non-performing assets (NPAs) declining to 9.37% as on June 30, 2021, from 9.59% as on March 31, 2021, and 16.77% as on March 31, 2020, largely because of substantial write-offs and reducing slippages. Profitability has also improved with the bank now reporting net profit for six consecutive quarters on account of increased focus on assets with higher yield, lower credit costs and high treasury profits. Asset quality and profitability will be closely monitored, given the current macro environment.

 

The ratings continue to reflect the expectation of strong support from the Government of India (GoI) and the bank’s moderate resource profile. These strengths are partially offset by average, albeit improving, asset quality and earnings.

 

Capital infusion of Rs 2,600 crore by GoI in fiscal 2021 and Rs 4,272 crore in fiscal 2020 has led to an improvement in capital adequacy ratios. The bank had capital-to-risk weighted assets ratio (CRAR) of 14.25% as on June 30, 2021, and 13.74% as on March 31, 2021, compared with 11.65% as on March 31, 2020.

 

In line with the Covid-19 relief measures of the Reserve Bank of India (RBI), UCO Bank had provided moratorium to its borrowers. While collection efficiency was impacted during the initial months of the moratorium, it improved thereafter. However, the intermittent lockdowns and localised restrictions to control the second wave of the pandemic affected the cash flows of borrowers and led to delays in the bank’s collections in April-June 2021. Any change in the payment discipline of borrowers will affect delinquency levels.

 

As on June 30, 2021, the bank had restructured 3.7% of its advances, of which 2.5% was under the RBI August 2020 resolution framework for Covid-19-related stress. Another 1% is likely to be restructured by September 30, 2021. Ability to manage collections and asset quality will remain a key monitorable. The impact of the third wave of the pandemic, if and when it comes, remains a key monitorable.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of UCO Bank and has factored in the expected strong government support.

Key Rating Drivers & Detailed Description

Strengths:

• Expectation of strong support from GoI

The government should continue to provide strong support both on an ongoing basis and in the event of distress, given that it is the majority shareholder in public sector banks (PSBs) and is the guardian of India's financial system. Stability of the banking sector is of prime importance to GoI, considering the sector’s criticality to the economy, the strong public perception of sovereign backing for PSBs, and adverse implications of any PSB failure, in terms of political fallout, systemic stability, and investor confidence. The majority ownership creates a moral obligation on the government to support PSBs, including UCO Bank.

 

As part of the Indradhanush framework, the government had pledged to infuse at least Rs 70,000 crore in PSBs over fiscals 2015 to 2019, of which Rs 25,000 crore each was infused in fiscals 2016 and 2017. In October 2017, the government outlined a recapitalisation package of Rs 2.11 lakh crore over fiscals 2018 and 2019 and allocated Rs 70,000 crore in fiscal 2020. UCO Bank received Rs 22,645 crore over fiscals 2016-2021, the latest being Rs 2,600 crore in March 2021.

 

• Moderate resource profile

Current account and savings account (CASA) deposits accounted for 38.7% of total deposits as on June 30, 2021, and 39.7% as on March 31, 2021. Savings account deposits have increased at a five-year compound annual growth rate (CAGR) of 12% to Rs 70,713 crore as on March 31, 2021, and were at Rs 71, 280 crore as on June 30, 2021. These deposits accounted for 34% of total deposits as on March 31, 2021, compared with 26% as on March 31, 2017. The bank’s cost of deposits was low at 4.29% for fiscal 2021.

 

The bank should maintain its resource profile, supported by its established market position in eastern India, which has helped maintain a stable deposit base in the region.

 

Weaknesses:

• Average, albeit improving, asset quality

Asset quality improved in fiscal 2021 but remains average with gross NPAs at 9.6% as on March 31, 2021, (9.4% as on June 30, 2021), compared with 16.8% as on March 31, 2020. The improvement was driven by write-offs of Rs 9,411 crore in fiscal 2021 (Rs 853 crore in the quarter ended June 30, 2021). The bank’s strategy to grow more granular assets in the retail, and micro, small and medium enterprise (MSME) segments, and adoption of conservative approach while lending to corporates, augur well for the asset quality. Focus on collections helped reduce slippages to 3.1% in fiscal 2021 from 8.5% in fiscal 2019. While the reported slippage was 6.1% in the June 2021 quarter, adjusting for one large account that slipped due to technical delay translates to slippage of 4.0%. This is the spill-over effect of the regulatory measures in fiscal 2021 that delayed the recognition of gross NPAs.

 

Given that a part of stress in the corporate book is now recognised, slippages in this segment are expected to be lower than in the past. Nevertheless, in the current challenging environment, the ability to maintain asset quality will be closely monitored.

 

• Vulnerability in profits, despite improvement

Profitability has improved largely because of better interest margin, higher other income (mainly treasury income and recovery from written-off accounts), and lower credit cost. Net interest margin has improved steadily to 2.24% in fiscal 2021 (2.32% in the quarter ended June 30, 2021) from 1.93% in fiscal 2019, backed by a growing loan book in the high-yield retail, agriculture, and MSME segments. Other income increased to 1.52% in fiscal 2021 (1.54% in the quarter through June 2021) from 0.68% in fiscal 2019, while credit cost reduced to 2.27% (1.79%) from 3.18%. UCO Bank reported net profit of Rs 167 crore in fiscal 2021, as against a loss of Rs 2,437 in fiscal 2020. Net profit for the quarter ended June 30, 2021, was Rs 102 crore. Provisioning cover as on June 30, 2021, was 61%.

 

While the bank has become profitable, the return of assets (RoA) remained low at 0.07% in fiscal 2021 (0.16% in the quarter ended June 30, 2021) and vulnerable to asset quality shocks. Thus, ability to manage credit costs and improve profitability will be closely monitored.

Liquidity: Strong

Liquidity remains supported by the strong retail deposit base. The liquidity coverage ratio stood at 229.9% as on March 31, 2021 and was higher than the regulatory requirement. The excess statutory liquidity ratio stood at Rs 29,732 crore (around 15% of net demand and time liabilities) as on June 30, 2021. Liquidity benefits from access to systemic sources of funds, such as the liquidity adjustment facility from the RBI and access to the call money market.

Outlook: Positive

CRISIL Ratings believes UCO Bank will continue to benefit from government support both on an ongoing basis as well as in the event of distress. Asset quality and profitability are expected to improve gradually over the medium term.

Rating Sensitivity factors

Upward factors

• Sustained and meaningful improvement in asset quality
• Improvement in profitability with positive RoA (above 0.15%) on a steady-state basis
• Healthy business growth/execution after exit from the Prompt Corrective Action framework

 

Downward factors

• Any change in the government’s stance of support
• Decline in the capital adequacy ratio to below minimum regulatory requirements

About the Bank

UCO Bank was founded in 1943 as United Commercial Bank, and got its current name by an Act of Parliament in 1985. In 2003, the bank made its initial public offering, resulting in dilution of government ownership. GoI owned 95.4% stake in the bank as on June 30, 2021. As on June 30, 2021, the bank had total advances and deposits of Rs 1,13,817 crore and Rs 2,12,097 crore, respectively.

 

Profit after tax (PAT) was Rs 167 crore and total income (net of interest expenses) was Rs 9,200 crore in fiscal 2021, as against a net loss of Rs 2,437 crore and total income (net of interest expenses) of Rs 7,963 crore for fiscal 2020.

Key Financial Indicators

Particulars	Unit	Q1FY2022	Q1FY2021
Total assets	Rs crore	2,49,930	234,685
Total income (net of interest expense)	Rs crore	2,430	2,041
Profit after tax	Rs crore	102	21
Gross NPA	%	9.4	14.4
Overall capital adequacy ratio	%	14.25	11.65
Return on assets	%	0.16	0.04

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating outstanding with outlook
NA	Certificate of deposits	NA	NA	7 to 365 Days	10000	Simple	CRISIL A1+
INE691A09185	Lower Tier-II bonds (under Basel II)	28-Dec-12	9.00%	28-Dec-22	1000	Complex	CRISIL A+/Positive