Rating Rationale

Strengths
* Strong expectation of support from government:
In its ratings on 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 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, 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 had received Rs 1,080 crore equity capital in fiscal 2016 and Rs 541 crore in fiscal 2017.

Further, in October 2017, the government had outlined recapitalisation package of Rs 2.11 lakh crores over fiscals 2018 and 2019, out of which PSBs will receive Rs 88,139 crore from the government in fiscal 2018. Union Bank has been allocated Rs 4,524 crore out of this for the current fiscal.

Government will continue to provide distress support to all PSBs and will not allow any of them to fail; it will also ensure they meet Basel III capital regulations.

* Adequate resource profile
Capitalisation is strong, backed by government support. Tier-I and overall capital adequacy ratio (under Basel III) were 8.5% and 11.2%, respectively, as on September 30, 2017 (9.0% and 11.8%, respectively, as on March 31, 2017). However, networth coverage for NPAs remained low at around 1 time as on September 30, 2017 (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 3.6% each as on September 30, 2017. 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 4295 (including four overseas branches) as on September, 2017; this facilitates access to a low-cost, stable resource base. As on September 20017, current accounts and savings account deposit-to-total deposit ratio was 33.6% (34.4% in March 2017). 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 12.35% as on September 30, 2017 (11.2% in March 2017). Slippages to NPA were high in the first-half of fiscal 2018 (around 5% of opening advances) primarily in vulnerable sectors such as iron and steel, infrastructure, and construction. As on September 30, 2017, 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 (~12% 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 monitorables 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 modest at 0.13% in fiscal 2017 and -1.2% (annualised) as of September 2017 due to increased provisioning on NPAs. Net interest margin dipped to 2.08% in the first-half of fiscal 2018 (2.26% in fiscal 2017), and is expected to remain under pressure in the near term due to pressure on loan yields and interest reversal on NPAs. The bank's increased provisioning on NPAs largely absorbed the pre-provision profits, which has weakened earnings. Ability to arrest weakening of asset quality and manage the resultant provisioning cost and, thereby, its impact on profitability, will remain monitorables.