Rating Rationale

Strengths
* Strong expectation of support from the 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 the 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 Union Bank. As part of the 'Indradhanush' framework, the 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. Union Bank received Rs 1,080 crore equity capital in fiscal 2016 and Rs 541 crore in fiscal 2017.

Furthermore, in October 2017, the government had outlined recapitalisation package of Rs 2.11 lakh crores over fiscals 2018 and 2019, out of which PSBs received around Rs 88,139 crore from the government in fiscal 2018. Union Bank has received Rs 4,524 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.

* Adequate capital profile
Capitalisation is adequate. As on June 30, 2018, it's Tier-I and overall capital adequacy ratio (under Basel III) were 9.0% and 11.5% respectively, (9.2% and 11.5% as on March 31, 2018). However, networth coverage for NPAs remained low at around 1 time as on June 30, 2018 (1.1 times as on March 31, 2017), given asset quality pressure. Nevertheless, Union Bank's capitalisation will remain adequate over the medium term on account of continued government support.

* Sizeable scale of operations backed by extensive branch network
Union Bank is the sixth-largest PSB by asset size. Its share in deposits and advances in the domestic banking system was around 3.5% each as on March 2018. The bank benefits from its wide reach in the rural and semi-urban areas, which accounted for around 60% of its total branch network of 4302 (including four overseas branches) as on June 30, 2018; this facilitates access to a low-cost, stable resource base. The current accounts and savings account deposit-to-total deposit ratio was 34% in the same period compared to 35.5% in June 2017. The bank is expected to maintain its market share and pan-India presence over the medium term.

Weakness
* Weak asset quality
Asset quality is expected to remain under pressure over the next few quarters. Gross NPA ratio was high at 16.0% as on June 30, 2018 (15.7% as on March 31, 2018 and 11.2% in March 2017). The slippage ratio remains high at around 6% of advances (annualized; as on June 30, 2018) but have moderated from ~7.5% levels in fiscal 2018. The corporate sector forms about 80% of the gross NPAs mainly from the sectors like iron and steel, engineering, power, textile etc. While the pace of incremental slippages is expected to moderate in the current fiscal compared to last, the extent of recoveries from NPA remains key to improvement in asset quality. The ability to contain slippages to NPAs and improve recoveries will continue to be monitorable in the near term.

* Modest earnings profile:
With pressure on net interest margins and rise in NPA provisions, profitability has come under pressure. The Return on Assets (RoA) for the quarter ending June 30, 2018 was 0.10% compared to -1.07% for fiscal 2018 and 0.13% in fiscal 2017 due to increased provisioning on NPAs. However, the pre-provision profits/average assets was relatively better at 1.8% for the quarter ended June 30, 2018 compared to 1.6% for fiscal 2018. The pre-provision profits was largely absorbed by increased provisioning on NPAs that has resulted into weak earnings. Ability to improve pre-provisioning profits and manage provisioning costs will remain a monitorable.