| Union Bank of India | ||||||||||||||||||||||||
| Ratings Reaffirmed; Tier-I Perpetual Bond (Under Basel II) withdrawn | ||||||||||||||||||||||||
| Rating Action | ||||||||||||||||||||||||
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| 1 crore = 10 million | ||||||||||||||||||||||||
| Refer to annexure for Details of Instruments & Bank Facilities | ||||||||||||||||||||||||
| *Transferred from erstwhile-Andhra Bank |
| Detailed Rationale |
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CRISIL has reaffirmed the ratings on long-term debt instruments of Union Bank of India (Union Bank) at 'CRISIL AA+/CRISIL AA-*/Negative'. CRISIL has transferred Tier II Bonds (Under Basel III) aggregating to Rs 2500, Infrastructure Bonds of Rs 550.1 crore and Tier I Bonds (under Basel III) aggregating to Rs 1400 crore to Union Bank from erstwhile-Andhra Bank. The rating on these instruments reflect the credit profile of the amalgamated bank. |
| Analytical Approach |
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For arriving at the ratings, CRISIL has considered the consolidated business and financial risk profiles of Union Bank and its subsidiaries. CRISIL has also factored in the strong support that the bank is expected to receive from its majority owner, GoI, both on an ongoing basis and in the event of distress. |
| Key Rating Drivers & Detailed Description |
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Strengths * Expectation of strong support from government The rating continues to factor in expectation of strong government support. This is because GoI 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 GoI to support PSBs, including Union Bank. As a part of the Indradhanush framework, GoI 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 8,601 crore in fiscal 2018 and Rs 21,028 crore in fiscal 2019 under this package. Also, GoI allocated Rs 70,000 crore in fiscal 2020, of which Rs 11,768 crore was received. Thus, over the past three fiscals, GoI has infused around Rs 41397 crore in the combined entity. The bank also has flexibility to raise additional equity from the market, with GoI stake at 89.1% as on June 30, 2020. The bank's common equity tier-1 ratio, Tier-I CAR and overall CAR stood at 8.4%, 9.5% and 11.6%, respectively, as on June 30, 2020 (8.6%, 9.8% and 12.1% as on March 31, 2020). * Sizeable scale of operations backed by extensive branch network Union Bank is the fourth-largest PSB by asset size, as on June 30, 2020. Its share in deposits and advances in the domestic banking system was 6.2% and 6.1%, respectively, as on June 30, 2020. The bank has 46% of the total advances in the form of loans to corporates followed by retail (20%), micro, small & medium enterprises (18%) and agriculture (16%). Within retail, housing loans constituted almost 47% of the loan book. The bank benefits from its sizeable branch network of 9,587 as on June 30, 2020 and wide reach in the rural and semi-urban areas, this facilitates access to a low-cost, stable resource base. As on June 30, 2020, current accounts and savings account (CASA) deposits-to-total deposit ratio was 33.3% (34.1% in March 31, 2020); while it 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. Weaknesses * Modest asset quality The bank's gross NPAs are elevated at 14.95% as on June 30, 2020 (14.59% as on March 31, 2020). Around 67% of the NPAs are contributed by the medium and large corporates, which have gross NPAs at 20.2% as on June 30, 2020 (19.5% as on March 31, 2020). As on June 30, 2020, retail, agriculture and micro-and-small segments had gross NPAs of 3.9%, 10.6% and 17.0%, respectively. The slippages for the bank remained high. It witnessed slippages of Rs 23,580 crore (4.1% of opening net advances) in fiscal 2020. With standstill on asset classification, incremental slippages in the first quarter of fiscal 2021 reduced to Rs 1,750 crore (1.2% (annualised) of opening net advances). However, the bank's ability to arrest slippages in a challenging macro-environment will be a monitorable. Also, the possible slowdown in recoveries over the medium term may impact bank's asset quality. This could be partly offset by the effective implementation of restructuring scheme announced by the RBI. Ability to contain slippages to NPAs and improve recoveries will remain key monitorable in the near to medium term. * Pressure on earnings profile Profitability has been constrained by high provisioning costs taken on board by the bank to support its balance sheet. The amalgamated bank is estimated to have reported a net loss of Rs 6,614 crore (with a negative RoA of 0.7%) for fiscal 2020 as against net loss of Rs 12,066 crore (with negative RoA of 1.3%) for fiscal 2019. Loss in fiscal 2020 declined due to lower provisioning expenses of Rs 24,317 crore (2.5% of average assets) in fiscal 2020 as against Rs 30,825 crore (3.2% of average assets) in the previous fiscal. In the quarter ended March-20, the bank adopted a conservative approach and harmonized provisions for common accounts at the highest level among the three merging banks. With the banks under the amalgamation process in fiscal 2020, operating expenses increased to 1.8% of average assets from 1.5% in fiscal 2019. Nevertheless, the bank has improved its pre-provisioning profit to 1.8% of average assets in fiscal 2020 from 1.7% of average assets in fiscal 2019 driven by increase in non-interest income to 1.2% of average assets from 0.9% of average assets in fiscal 2019. With decline in incremental slippages owing to standstill in asset classification, credit costs declined to 1.4% (annualised) of the total assets in the first quarter of fiscal 2021 from 2.5% in fiscal 2020. Hence, with the support of treasury income of Rs 637 crore, the bank reported a profit of Rs 333 crore with RoA of 0.1% (annualised). Further, the bank has maintained relatively high PCR at 70.3% as on June 30, 2020. Nevertheless, profitability is a key monitorable given the current challenging environment due to the pandemic, and hence earnings will remain a key rating sensitivity factor. |
| Liquidity Strong |
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Liquidity should remain comfortable, supported by strong retail deposit base. Liquidity coverage ratio stood well above the minimum regulatory requirements as on June 30, 2020.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: Negative |
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The 'Negative' outlook on the debt instruments reflects the potential stress on the bank's asset quality, and consequently its profitability, on account of the challenging macro environment. However, Union Bank should continue to benefit from strong government support and large size and scale. |
| About the Bank |
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Incorporated in 1919 in Mumbai, Union Bank was nationalised in 1969. GoI's ownership stood at 89.1% as on June 30, 2020, post issuing shares under amalgamation to the shareholders of Andhra Bank and Corporation Bank. |
| 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 and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels. |
| Annexure - Details of Instrument(s) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
*Transferred from Andhra Bank | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - List of Entities Consolidated | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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