Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA/Stable’ rating to the Rs 1500 crore Tier I bonds (under Basel III) of Union Bank of India (Union Bank). CRISIL Ratings has also reaffirmed its ‘CRISIL AA+/CRISIL AA/Stable’ rating on the other debt instruments.

 

On October 01, 2021, CRISIL Ratings had upgraded its rating on the Tier I bonds (under Basel III) of Union Bank to ‘CRISIL AA/Stable’ from ‘CRISIL AA-/Stable’. The upgrade in the rating of Tier I bonds (under Basel III) factored in improved position of Union Bank to make future coupon payments, supported by the capital raise and an adjustment of accumulated losses with share premium account in fiscal 2021. Pursuant to the adjustment, the eligible reserve to total assets ratio for the bank has improved. Other public sector banks (PSBs) have also utilized the provision of adjustment of accumulated losses with share premium account. This provision is part of the Department of Financial Services Gazette notification no. CG-DL-E-23032020-218862 (S.O. 1200 E) dated 23.03.2020 referred to as Nationalised Banks (Management and Miscellaneous Provisions) Amendment Scheme, 2020. As part of the same, the bank still has share premium reserves which can be utilised to set off any losses in future, and this supports the credit profile of tier I (under Basel III) instruments. However, any substantial depletion of the share premium account or any regulatory changes to appropriation of the share premium account pertaining to adjustment of accumulated losses are key monitorables.

 

Supported by the regular capital infusion made by the Government of India (GoI), equity raised via qualified institutional placements (QIP) and improved accruals, Union Bank’s capital ratios have improved, as reflected in tier 1 and overall capital to risk-weighted adequacy ratio (CRAR) of 11.4% and 13.6%, respectively, as on September 30, 2021 as against 10.1% and 12.4%, respectively, as on September 30, 2020 (10.4% and 12.6%, respectively, as on March 31, 2021).

 

The overall ratings continue to reflect the expectation of strong support from the majority stakeholder, GoI, and the bank’s sizeable scale of operations. These strengths are partially offset by modest asset quality and modest, albeit improving, earnings profile.

 

In line with relief measures announced by the Reserve Bank of India (RBI) during the Covid-19 pandemic, Union Bank had provided a moratorium to its borrowers. Though collections declined during the initial months, they have inched up subsequently. However, the second wave of the pandemic led to intermittent lockdowns and localised restrictions, thus impacting collections once again. Although the impact has been moderate during this phase, any adverse change in payment discipline of borrowers may lead to higher delinquencies.

 

Under the schemes announced by the RBI dated January 1, 2019, February 11, 2020 and August 6, 2020, and the resolution framework 1.0 for stressed accounts, Union Bank had restructured 1.9% of gross advances as on September 30, 2021. Pursuant to RBI’s resolution framework 2.0 in May 2021, restructuring stands at 1.4% of gross advances. Nevertheless, the ability of the bank to manage collections and asset quality going forward this fiscal, is a key monitorable. Going forward too, the impact of the third wave of the pandemic, if and when it comes in terms of its spread, intensity and duration, will also be closely monitored.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has considered the consolidated business and financial risk profiles of Union Bank and its subsidiaries. CRISIL Ratings has also factored in the strong support that the bank is expected to receive from its majority owner, the central government, both on an ongoing basis and in the event of distress.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Expectation of strong support from the government

The ratings continue to factor in expectation of strong government support. This is because the central government is the majority shareholder in public sector banks (PSBs) and the guardian of India's financial system. Stability of the banking sector is of prime importance to the government, given its criticality to the economy, strong public perception of sovereign backing for PSBs, and severe 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 Union Bank. Any material change in shareholding by GoI and/or privatisation of the bank in line with Finance Minister’s announcement in the recent budget for privatisation of two PSBs will be a key rating sensitivity factor.

 
As a 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. Union Bank, Andhra Bank and Corporation Bank together received Rs 10242 crore in fiscal 2018 and Rs 21,028 crore in fiscal 2019 under this package. Also, the government allocated Rs 70,000 crore in fiscal 2020, of which Rs 11968 crore was received.

 

The bank also has flexibility to raise additional equity from the market, with the central government stake at 83.5% as on September 30, 2021. The bank has raised Rs 1,705 crore of Tier 1 and Rs 2,000 crore of Tier 2 bonds in the fiscal 2021 and Rs 2000 crore of Tier II bonds in fiscal 2022 till now. The bank has also completed its QIP of Rs 1447 crore in May 2021. The bank’s CET-1 ratio, Tier-I CAR and overall CAR stood at 10.2%, 11.4% and 13.6%, respectively, as on September 30, 2021 (9.1%, 10.4% and 12.6% as on March 31, 2021).

 

Sizeable scale of operations, backed by extensive branch network

Union Bank is among the larger PSBs with share in deposits and advances in the domestic banking system at ~6% each as on September 30, 2021. The bank has 43% of its total advances in the form of loans to corporates followed by retail (20%), agriculture (20%) and micro, small and medium enterprises (17%). Within retail, housing loans constituted almost 53% of the loan book.

 

The bank benefits from its sizeable branch network of 9,274 as on September 30, 2021, and wide reach in rural and semi-urban areas, which facilitates access to low-cost, stable resource base. As on September 30, 2021, current account and savings account (CASA) deposits-to-total deposit ratio was 37.2% (34.6% as on September 30, 2020). While this is adequate, it is lower than that for some of the other large banks. Union Bank is likely to maintain its market share and pan-India presence over the medium term.

 

Weakness:

Modest asset quality

The bank’s asset quality, with reported gross NPAs of 12.6% as on September 30, 2021 (13.7% as on March 31, 2021 and 14.6% as on March 31, 2020) remains modest. Around 46% of the NPAs are contributed by large corporates, which have gross NPAs of around 13.6% as on September 30, 2021 (16.2% as on March 31, 2021). The same has come down from 19.5% as on March 31, 2020 – largely on account of write-offs. As on September 30, 2021, retail, agriculture and micro-and-small segments had gross NPAs of around 4.2%, 12.4% and 20.4%, respectively. Slippages for the bank improved in fiscal 2021 at 2.9% (Rs 17443 crore) as against 4.1% (Rs 23,580 crore) and 4.5% (Rs 25,135 crore) witnessed in fiscal 2020 and fiscal 2019, respectively. However, the same increased to 4.7% (annualised; Rs 13795 crore) of opening net advances for the quarter ended September 30, 2021 – driven the impact of second wave of Covid-19. Corporate segment accounted for 36% of the slippages followed by MSME and agriculture segment at 34% and 18%, respectively.  Furthermore, the bank’s standard restructured accounts were at 3.4% of advances as on September 30, 2021

 

Asset quality of the bank, as well as performance of the restructured accounts and ability of the management to contain slippages to NPAs and improve recoveries will remain key monitorables in the near to medium term.

Modest, albeit improving, earnings profile

Profitability, for the last few years, had been constrained primarily by high provisioning costs taken by the bank. However, the profitability of the bank improved in fiscal 2021 with profit of Rs 2905 crore with return on assets (RoA) of 0.3% as against an estimated loss of 6,614 crore (with a negative return on assets RoA of 0.7%) for the amalgamated bank for fiscal 2020. The improvement was driven by improvement in credit costs, which improved to 1.6% (Rs 16860 crore) of average assets in fiscal 2021 as against an estimated 2.5% (Rs 24317 crore) in fiscal 2020. Further, supported by cost rationalisation measures, operating expenses improved to 1.6% of average assets for fiscal 2021, from 1.8% in fiscal 2020.

 

For the half year ended September 30, 2021, the bank reported a PAT of Rs 2707 crore with an RoA of 0.5%. Credit costs[1] of the bank moderated to 1.3% (annualised; Rs 7126 crore) of average assets for the half-year ended September 30, 2021. PCR (excluding the technical write-offs) of the bank continues to remain high at around 66.6% as on September 30, 2021 (69.6% as on March 31, 2021).

 

Nevertheless, improvement and sustainability of the profitability will remain a key rating sensitivity factor.

 

¹It is the ratio of provisions & contingencies (other than tax) and average total assets for the period.

Liquidity: Strong

Liquidity should remain comfortable, supported by strong retail deposit base. Liquidity coverage ratio stood at 175%, which is well above the minimum regulatory requirement as on September 30, 2021, 2020. Excess investments eligible for statutory liquidity ratio was Rs 94512 crore (10.21 %) as on September 30, 2021. Liquidity also 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

Union Bank should continue to benefit from strong government support and its large size and scale.

Rating Sensitivity factors

Upward Factors

• Improvement in asset quality and profitability on a sustained basis with the bank reporting RoA of over 0.4% on steady-state basis.
• Capitalisation metrics improving considerably with significant cushion over the regulatory requirements
• Improvement in proportion of CASA deposits to overall deposits from current levels

 

Downward Factors

• Material change in shareholding and/or expectation of support from GoI
• Deterioration in asset quality with gross NPAs rising from current levels
• Decline in CAR below minimum regulatory requirements (including CCB, which is Tier I of 9.5% and overall CAR of 11.5%) for an extended period

About the Bank

Incorporated in 1919 in Mumbai, Union Bank was nationalised in 1969. The government’s ownership stood at 83.5% as on September 30, 2021.

 

Amalgamation of Andhra Bank and Corporation Bank into Union Bank was effective from April 1, 2020. Post amalgamation, the merged entity enjoys the benefits of larger balance sheet and wider geographical reach. As on September 30, 2021, Union Bank is one of the top five largest PSBs with total assets of Rs 1061894 crore and strong domestic branch network comprising 9274 branches and 11677 automated teller machines.

 

The bank reported a profit of Rs 2707 crore on total income (net of interest expense) of Rs 20600 crore for the half year ended September 30, 2021, against Rs 849 crore and Rs 17140 crore, respectively, in the corresponding period of the previous year.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs.Cr)	Complexity level	Outstanding rating with Outlook
NA	Tier-I Bond Issue (Under Basel III)*	NA	NA	Perpetual	1500	Highly complex	CRISIL AA/Stable
INE692A08169	Tier-I Bond Issue (Under Basel III)	22-Nov-21	8.70	Perpetual	2000	Highly complex	CRISIL AA/Stable
INE692A08094	Tier II Bonds (under Basel III)	16-Sep-20	7.42	16-Sep-30	1000	Complex	CRISIL AA+/Stable
INE692A08102	Tier II Bonds (under Basel III)	26-Nov-20	7.18	26-Nov-35	1000	Complex	CRISIL AA+/Stable
INE692A09241	XVI-B Lower Tier II	28-Dec-12	8.9	28-Dec-22	800	Complex	CRISIL AA+/Stable
INE692A08045	Basel III compliant Tier 2 Bonds	24-Nov-16	7.74	24-Nov-26	750	Complex	CRISIL AA+/Stable
INE692A09266	XVII-A Basel III compliant Tier II bonds	22-Nov-13	9.8	22-Nov-23	2000	Complex	CRISIL AA+/Stable
INE434A08083	Tier-I Bond Issue (Under Basel III)	31-Oct-2017	9.2%	Perpetual	500	Highly complex	CRISIL AA/Stable
INE434A08075	Tier-II Bond Issue (Under Basel III)	24-Oct-2017	7.98%	24-Oct-27	1000	Complex	CRISIL AA+/Stable

*Yet to be issued