Detailed Rationale

CRISIL Ratings has upgraded its rating on the Tier II Bonds (under Basel III) of Union Bank of India (Union Bank) to ‘CRISIL AAA/Stable’ from ‘CRISIL AA+/Positive’ and rating on Tier I Bonds (under Basel III) of the bank have been upgraded to ‘CRISIL AA+/Stable’ from ‘CRISIL AA/Positive’. 

 

CRISIL Ratings has also withdrawn its rating on Tier II bonds (under BASEL III) of Rs 2000 crore (See Annexure 'Details of Rating Withdrawn' for details) in line with its withdrawal policy. CRISIL Ratings has received independent confirmation that these instruments have been fully redeemed.

 

The upgrade in rating is driven by sustained improvement in asset quality and profitability of the bank while capitalization and market position remained strong. The rating continues to factor in the expectation of strong government support, both on an ongoing basis and in the event of distress

 

The GNPA reduced to 6.4% as on September 30, 2023 from 7.5% as on March 31, 2023 and 11.1% as on March 31, 2022, driven by reduction in slippages and enhanced recovery efforts of the bank. The improvement in GNPA stems primarily from the MSME (Micro, Small and Medium Enterprise) and corporate book which is supporting the overall asset quality metrics. CRISIL Ratings expects the trajectory of gradual improvement in asset quality to continue going forward. Return on Assets (RoA) increased from 0.5% in fiscal 2022 and 0.7% in fiscal 2023 to 1.0% (annualized) in the first half of fiscal 2024, this is supported by improved net interest margins, stable operating expenses and reduced credit cost on account of improvement in the overall asset quality of the bank.

 

The banks has raised additional equity capital of Rs 5,000 crore in the second quarter of fiscal 2024 via Qualified Institutional Placement (QIP), this resulted in a CAR of 16.7% as on September 30, 2023, as against 16.0% as on March 31, 2023.

 

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

 

The rating on the Tier I bonds (under Basel III) meets 'CRISIL's rating criteria for BASEL III-compliant instruments of banks'. CRISIL Ratings evaluates the bank's (i) reserves position (adjusted for any medium-term stress in profitability) and (ii) cushion over regulatory minimum Common Equity Tier I (CET1; including Capital Conservation Buffer - CCB) capital ratios. Also evaluated is the demonstrated track record and management philosophy regarding maintenance of sufficient CET1 capital cushion above the minimum regulatory requirements.

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.

 

Adequate Capitalisation

The bank’s CET-1 ratio, Tier-I CAR and overall CAR remained comfortable at 12.4%, 13.9% and 16.0%, respectively, as on March 31, 2023 (10.6%, 12.2% and 14.5% as on March 31, 2022). The same has improved to 13.0%, 14.5% and 16.7% respectively as on September 30, 2023 on account of equity infusion and strong internal accruals. In Q2 2024, the bank raised additional equity of Rs 5,000 crore from the market as a result of which the stake of GoI in the bank reduced to 77% as on September 30, 2023 from 83.5% as on March 31, 2023. Previously, the bank had raised Rs 2200 crore of Tier 2 bonds and Rs 1983 crore of Tier 1 bonds in fiscal 2023 and Rs 1447 crore via equity in fiscal 2022.

 

Sizeable scale of operations, backed by extensive branch network and stable growth

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, 2023. The gross advances grew by ~9% (annualized) to Rs 8,47,214 crore in first half of fiscal 2024 from to Rs 8,09,905 crore as on March 31, 2023 and Rs 7,16,408 crore as on March 31, 2022 which is a 13% year on year growth in fiscal 2023.  The bank has 46% of its total advances in the form of loans to corporates followed by retail (19%), agriculture (19%) and micro, small and medium enterprises (16%). Within retail, housing loans constituted almost 50% of the loan book.

 

The bank benefits from its sizeable branch network of 8,521 as on September 30, 2023 31, 2023, and wide reach in rural and semi-urban areas, which facilitates access to low-cost, stable resource base. As on September 30, 2023, current account and savings account (CASA) deposits-to-total deposit ratio was 34.7% (36.5% as on March 31, 2022). 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:

Average, albeit improving, earnings profile

Profitability of the bank was historically constrained primarily by high provisioning costs. However, it has improved over the last few fiscals. The bank reported a profit after tax (PAT) of Rs 6748 crore in the first six months of fiscal 2024 (return on assets (RoA) of 1.0%) as against PAT Rs 8433 crore with RoA of 0.7% in fiscal 2023 (PAT of Rs 5232 crore with RoA of 0.5% in fiscal 2022).

 

The improvement was driven by increase in Net interest income (NII) from Rs 27786 crore (2.5% of average total assets) in FY 22 to Rs 32765 core (2.6% of average total assets) in FY 23. For H1FY24, NII was Rs 18,182 crore (2.8%(annualized) of average total assets). Another factor which contributed to the increase in profits was the increase in other income from 1.1% of average total assets in FY 22 to 1.2% in FY 23 and 1.3%(annualized) in H1FY24.  Further, supported by cost rationalisation measures taken by the bank in the recent past, operating expenses remained range bound between 1.6% -1.8% of average assets between fiscals 2022 and fiscal 2023 and credit cost reduced from 1.2% of average total assets in FY22 to 1.1% in FY23 and further to 0.6% (annualized) in H1FY24. Parallel to reduction in credit cost, the provisioning coverage ratio (PCR) of the bank remained high at around 80% in H1FY24 and 78.8% as on March 31, 2023 (69.5% as on March 31, 2022).

 

Nevertheless, sustenance in improvement of profitability will remain a key monitorable.

Asset Quality, though improved from previous levels, remains modest:

The bank reported gross NPAs of 6.4% as of September 30, 2023, reduced from 7.5% as on March 31, 2023 (11.1% as on March 31, 2022 and 13.7% as on March 31, 2021). This metric has been on an improving trajectory owing to reduced slippages and increased recoveries. Around 43% of the NPAs are contributed by large corporates, which have gross NPAs of around 5.4% as on September 30, 2023 (7.3% as on March 31, 2023). The same has come down from 19.5% as on March 31, 2020 – driven by the write-offs. As on September 30, 2023, retail, agriculture, and micro--small and medium segments had gross NPAs of around 2.8%, 8.9% and 10.5%, respectively.

 

The slippages (as percentage of opening net advances), which had elevated to 4.1% (Rs 25147 crore) in fiscal 2020 and 3.9% (Rs 22877 crore) in fiscal 2022 post covid, have reduced to 1.9% (Rs 12518 crore) in fiscal 2023 and subsequently to 0.7% (Rs 5783 crore) in first six month of fiscal 2024. Furthermore, the bank’s standard restructured accounts were at around 2.28% of advances as on September 30, 2023.

 

Although the bank has shown improvement in asset quality, a sustained reduction of gross NPA (GNPA) and slippages along alongside uninterrupted recoveries, will remain key monitorables in the near to medium term.

Liquidity: Superior

Liquidity should remain comfortable, supported by strong retail deposit base. Liquidity is supported the access to LAF window of RBI and refinance lines from financial institutions and LCR of ~144% for the quarter ended September 30, 2023. 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

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 ~77% as on September 30, 2023.

 

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, 2023, Union Bank is one of the top five largest PSBs with total assets of Rs 13,14,373 crore and strong domestic branch network comprising 8,519 branches.

 

The bank reported a profit of Rs 6748 crore on a total income (net off interest expense) of Rs 25564 crore in H1FY24 and profit of Rs 8433 crore on total income (net of interest expense) of Rs 47398 crore for the fiscal 2023, against Rs 5232 crore and Rs 40312 crore, respectively, in the previous fiscal.

Any other information: Not Applicable