| Union Bank Of India Limited | ||||||||
| Rating placed on 'Watch Developing' | ||||||||
| 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 placed its rating on the long term debt instruments of Union Bank Of India Limited (Union Bank) on 'Rating Watch with Developing Implications'. |
| Analytical Approach |
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For arriving at the ratings, CRISIL has considered the standalone business and financial risk profiles of Union Bank, and factored in the support the bank is expected to receive from GoI. This is because GoI is both the majority shareholder in public sector banks (PSBs) and the guardian of India's financial system. The stability of the banking sector is of prime importance to GoI, given the criticality of the sector to the economy, the strong public perception of sovereign backing for PSBs, and the severe implications of any PSB failure in terms of political fallout, systemic stability, and investor confidence in public sector institutions. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Strong expectation of support from government In its ratings on PSBs, CRISIL continues to factor in strong support from the GoI, which is both the majority shareholder and the 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 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; Union Bank received Rs 4112 crore in fiscal 2019 and Rs.4524 crore in fiscal 2018. * Adequate capital profile Government infused Rs.4112 crore in fiscal 2019 whereby it's tier-I and overall capital adequacy ratio (under Basel III) increased to 12.8% and 15.1%, respectively as on September 30, 2019, from 9.6% and 11.9%, respectively, as on March 31, 2019. Further, Bank received Rs 11,768 crore capital infusion from GoI as a part of CET-1 Capital in September 2019. However, banks networth coverage for NPAs declined marginally to 1.2 times as on September 30, 2019 (~1.3 times as on March 31, 2019), 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 3.4% and 3.3%, respectively, as on September 30, 2019. The bank benefits from its wide reach in the rural and semi-urban areas, which accounted for 59% of its total branch network of 4285 (including three overseas branches) as on September 2019; this facilitates access to a low-cost, stable resource base. As on September 30, 2019, current accounts and savings account deposit-to-total deposit ratio was 33.8% (36.1% in March 2019). The bank is expected to maintain its market share and pan-India presence over the medium term. Weaknesses: * Asset quality remains weak Asset quality is expected to remain under pressure over the next few quarters. Gross NPA ratio was high at 15.2% as on September 30, 2019 (15.0% as on March 31, 2019 and 15.7% as on March 31, 2018). However, slippages to NPA moderated to 4.7% during fiscal 2019 compared to 7.5% in fiscal 2018 as most of the chunky exposures to stressed sectors such as iron and steel, infrastructure, and construction have been recognized as NPA. As on March 31, 2019, about two-third of the stock of gross NPAs are contributed by the corporate segment and its exposure remains high in vulnerable segments such as infrastructure (~17% of advances). Stress will persist in the near term from weakness in corporate portfolios, especially in loans in restructured category and loans structured under schemes such as the strategic debt restructuring scheme and flexible structuring. Ability to contain slippages to NPAs and improve recoveries will remain key 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 RoA was at -0.6% for fiscal 2019 (-1.1% in fiscal 2018) due provisioning on NPAs. Moreover, the pre-provision profits/ average total assets were 1.6% for the half year ended September 30, 2019 (1.53% during fiscal 2019) was largely absorbed by NPA provisions that resulted in weak earnings. However, earnings in H2FY20 is expected to be supported by recoveries from some large stressed corporate accounts. Nevertheless, ability to arrest weakening of asset quality and manage the resultant provisioning cost and, thereby, its impact on profitability, will remain monitorable. |
| Liquidity Superior |
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The banks liquidity is comfortable supported by strong retail deposit base. The Liquidity Coverage Ratio of the bank stood at 186.2% as on September 30, 2019, as against statutory minimum of 100%. The bank's 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. |
| Rating Sensitivity factors |
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Upward factors * Improvement in asset quality and profitability on a sustained basis with the bank reporting RoA of over 0.75% on a steady state basis. * The capitalisation metrics improving considerably with significant cushion over the regulatory requirements Downward factors * Deterioration in asset quality with GNPAs rising from current levels, and/or * Decline in capital adequacy ratios below minimum regulatory requirements (including CCB, which is Tier I of 9.5% and overall CAR of 11.5% as on March 31, 2020) for an extended period |
| About the Bank |
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Incorporated in 1919 in Mumbai, Union Bank was nationalised in 1969. The government stake in bank was 74.3% as of September 2019. The Bank had total business size (advances plus deposits) of Rs 7.7 lakh crore as on September 30, 2019. Retail, agriculture and MSME (micro small and medium enterprises) together form around 57% of the Banks advances as on September 30, 2019. For half year ending September 30, 2019, the bank reported a loss of Rs.969 crore on a total income (net of interest expense) of Rs.7557 crore. |
| 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. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
| Annexure - Details of Instrument(s) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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