Rating Rationale

Strengths
* Strong expectation of support from government
In its ratings on public sector banks (PSBs), CRISIL continues to factor in the strong support of the government, which is both the majority shareholder and guardian of India's financial system. Stability of the banking sector is of prime importance to the government, given criticality of the sector to the economy, strong public perception of sovereign backing for PSBs, and severe implications of failure of any PSB in terms of political fallout, systemic stability, and investor confidence in public sector institutions. Majority ownership creates a moral obligation on the government to support PSBs, including UCO Bank. As part of the 'Indradhanush' framework, government has pledged to infuse at least Rs 70,000 crore in PSBs between fiscals 2015 and 2019, of which Rs 25,000 crore each was infused in fiscals 2016 and 2017. UCO Bank received Rs 935 crore and Rs 1,925 crore of equity capital from GoI in fiscals 2016 and 2017, respectively. Further, in October 2017, the government had outlined recapitalization package of Rs 2.11 lakh crores over fiscals 2018 and 2019, out of which PSBs received ~Rs 88,139 crore from the government in fiscal 2018. UCO Bank has received Rs 6,507 crore out of this in fiscal 2018. Government will continue to provide distress support to all PSBs and will not allow any of them to fail; it will also support them to meet Basel III capital regulations.

* Moderate resource profile
Current account and savings account (CASA) deposits as a proportion of total deposits increased to 35.5% as of June 30, 2018, from 30.9% a year before. Cost of deposits improved to 5.05% during first quarter of fiscal 2019, from 5.50% for the corresponding period previous fiscal. The bank will maintain moderate resource profile over the medium term supported by its well-established market position in eastern India, which has helped the bank maintain a stable deposit base in the east.

Weaknesses
* Weak asset quality
Asset quality for the bank is expected to remain under pressure over the medium term. Gross non-performing asset (NPA) ratio was high at 25.71% as on June 30, 2018 (24.64% as on March 31, 2018). The slippages also remains high at 6.7% of advances (annualized, based on the performance for quarter ended June 30, 2018), though declined from 12.6% levels in fiscal 2018. Large industries forms about 65% of the gross NPAs mainly from the sector like iron and steel, engineering, power, textile etc. While the pace of incremental slippages is expected to moderate further in the current fiscal compared to last, the extent of recoveries from NPA remains key to improvement in asset quality. The ability of the bank to contain slippages to NPAs and improve recoveries remains a key monitorable.

* Weak earnings profile
Earnings profile has also remained subdued due to rise in NPA provisions. Net loss and return on assets (annualized) stood at Rs 634 crore and a negative 1.2%, respectively, for the first quarter of fiscal 2019 (Rs 663 crore and a negative 1.16%, respectively, for the corresponding period of previous fiscal). Provisioning cost will remain high over the near term on account of ageing of NPAs and increase in provisioning requirements against accounts referred to National Company Law Tribunal. Profitability is therefore likely to remain under pressure over the medium term.