| UCO Bank | ||||||||
| Ratings Reaffirmed; Upper Tier-II Bonds Withdrawn | ||||||||
| Rating Action | ||||||||
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| 1 crore = 10 million | ||||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has reaffirmed its ratings on the debt instruments of UCO Bank at 'CRISIL A+/Stable/CRISIL A1+'. CRISIL has also withdrawn its ratings on the Rs 800 crore lower Tier-II bonds (under Basel II) and Rs 500 crore upper Tier-II bonds (under Basel II) as these bonds have been redeemed and there is nothing outstanding against them. The withdrawal is in line with CRISIL's policy on withdrawal of ratings. |
| Analytical Approach |
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For arriving at the ratings, CRISIL has considered the standalone business and financial risk profiles of UCO Bank. CRISIL has also factored in the strong government support expected, both on an ongoing basis and in the event of distress. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Expectation of strong support from GoI The government should continue to provide strong and timely 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. Further, in October 2017, the government had 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 20,045 crore over fiscals 2016-2020. * Moderate resource profile Current account and savings account (CASA) deposits as a proportion of total deposits was 40.1% as on June 30, 2020 (40.2% as on March 31, 2020 and 44.5% a year before). Fiscal 2019 had witnessed a spike in current account deposits (to total deposits) to 13.4% from 5.3% in fiscal 2018, after the bank was designated for settling the payments for oil trade with Iran, which was under sanctions imposed by the US. However, in line with the expectations after these sanctions were lifted, the CASA deposits scaled down to a long-term average level of around 40% in fiscal 2020. Savings account deposits have been steadily increasing with a three-year compound annual growth rate (CAGR) of 7% to Rs 63,607 crore as on March 31, 2020. These deposits accounted for 33% of total deposits as on March 31, 2020, compared with 26% as on March 31, 2017. The bank should maintain its resource profile over the medium term, supported by the well-established market position in eastern India, which has helped maintain a stable deposit base in the region. Weaknesses: * Weak asset quality Though the asset quality improved in fiscal 2020, it remained weak with overall gross non-performing assets (GNPAs) ratio high: 16.8% as on March 31, 2020, and 14.4% as on June 30, 2020. The improvement in the GNPA ratio from 25.0% in fiscal 2019 was mainly driven by the substantial write-offs of Rs 12,479 crore in fiscal 2020 and Rs 2,918 crore in the quarter ended June 30, 2020. Lower GNPAs in the June quarter of fiscal 2021 was also aided by the moratorium and standstill provision on asset classification, which led to low slippages. Slippages improved to 1.5% in the June 2020 quarter from 6.2% in fiscal 2020 and 8.5% in fiscal 2019. The incremental focus on growing the granular asset segments such as retail, agriculture, and micro, small and medium enterprise (MSME) segment, along with the bank's approach of select lending in the corporate segment may help reduce slippages from earlier levels. However, in the near-term, asset quality may be under pressure owing to the pandemic and possible slowdown in recoveries. * Weak earnings profile Earnings have been negatively impacted due to the deterioration of asset quality in the past few fiscals. Credit cost remained high at 3.1% in fiscal 2020 and 3.2% in 2019. In fiscal 2020, the adverse impact of high credit cost was partially offset by an improved interest margin and higher other income, which was supported by treasury income and recovery from written-off accounts. The net interest margin improved to 2.18% in fiscal 2020 from 1.93% in the previous fiscal. Consequently, net loss was Rs 2,437 crore (return on assets a negative 1.1%) in fiscal 2020, down from Rs 4,321 crore (a negative 1.9%) in fiscal 2019. In the quarter ended June 30, 2020, net profit was Rs 21 crore (0.04%), supported by lower provisions (credit cost of 2.0%) and treasury profits. Nevertheless, the provisioning coverage ratio remained high at 69% as on June 30, 2020. The ability to manage credit costs and improve profitability remains a key monitorable. |
| Liquidity Strong |
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Liquidity should remain supported by the strong retail deposit base. The liquidity coverage ratio stood at 187.5% as on March 30, 2020, as against the statutory minimum of 80%. Further, the excess statutory liquidity ratio stood at Rs 60,488 crore (around 31.27% of net demand and time liabilities) as on June 30, 2020. Additionally, liquidity benefits from access to systemic sources of funds, such as the liquidity adjustment facility from RBI and access to the call money market. |
| Outlook: Stable |
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The credit risk profile should continue to benefit from government support both on an ongoing basis as well as in the event of distress. Asset quality and profitability, though, will remain under pressure over the medium term. |
| Rating Sensitivity factors |
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Upward factors * Sustained and meaningful improvement in asset quality * Improvement in profitability with positive return on assets (above 0.1%) on a steady-state basis Downward factors * Any change in stance of support by the government * A decline in the capital adequacy ratio to below minimum regulatory requirements, which are 9.5% for Tier I and 11.5% overall (including capital conservation buffer) |
| About the Bank |
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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 94.4% stake in the bank as on June 30, 2020. As on June 30, 2020, the bank had total advances and deposits of Rs 103,769 crore and Rs 195,120 crore, respectively. |
| Key Financial Indicators | ||||||||||||||||||||||||||||
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels. |
| Annexure - Details of Instrument(s) | ||||||||||||||||||||||||
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| Annexure - Details of Rating Withdrawn | ||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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