Rating Rationale
December 19, 2019 | Mumbai
United Bank of India
Ratings placed on 'Watch Positive' 
 
Rating Action
Rs.500 Crore Tier II Bonds (Under Basel III)  CRISIL A+ (Placed on 'Rating Watch with Positive Implications')
Rs.500 Crore Tier II Bonds (Under Basel III)  CRISIL A+ (Placed on 'Rating Watch with Positive Implications')
Rs.500 Crore Tier II Bonds (Under Basel III)  CRISIL A+ (Placed on 'Rating Watch with Positive Implications')
Rs.200 Crore Lower Tier-II Bonds (under Basel II)  CRISIL A+ (Placed on 'Rating Watch with Positive Implications')
Rs.300 Crore Perpetual Tier-I Bonds (under Basel II)  CRISIL A- (Placed on 'Rating Watch with Positive Implications')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has placed its ratings on the debt instruments of United Bank of India (United Bank) on 'Rating Watch with Positive Implications'.
 
On August 30, 2019, the Ministry of Finance announced a set of reforms for public sector banks (PSBs) including consolidation, capital infusion and measures to enhance governance standards. A key announcement was also the amalgamation of 6 PSBs into 4 anchor PSBs. As part of this announcement, it was proposed to amalgamate United Bank and Oriental Bank of Commerce (OBC) with Punjab National Bank (PNB). In response to the announcement, CRISIL had published a Credit Bulletin on September 5, 2019 conveying that it will continue to closely monitor developments and engage with various stakeholders, and take appropriate rating action thereafter.
 
The ratings on the debt instruments of United Bank has now been placed on 'Watch with Positive Implications' given the significant progress on the amalgamation including approvals from the Boards of Directors of both banks. CRISIL expects that the credit profile of the merged entity to be better than that of United Bank currently. On September 18, 2019, an in-principle approval from the Boards of Directors of United Bank, OBC and PNB was received. Later, on November 18, 2019, Alternative Mechanism also accorded its in-principle approval for the amalgamation of United Bank and OBC with PNB. Further, CRISIL has had discussions with several of the amalgamating banks and understands that the joint consultation process in terms of branch rationalisation, alignment of policies, processes and products and joint training of staff is already underway. The merger is expected to be completed after receipt of all regulatory approvals. CRISIL will resolve the rating watch once clarity emerges on the merger completion. 
 
In terms of pro-forma merged financials, the merged bank would have total assets of Rs 12.2 lakh crore, with gross non-performing assets (NPAs) of 15.7% as on September 30, 2019. Common equity tier I (CET-I), Tier I and overall capital adequacy ratios (CAR) of the merged entity were at 11.1%, 12.0% and 14.1% as on September 30, 2019. On the business side, there are potential synergies stemming from a larger distribution network with deeper penetration in key states and operational efficiencies. The global network strength of PNB can be leveraged to provide overseas access to customers of United Bank and OBC, too.
 
Till the amalgamation is complete, the ratings on the debt instruments of United Bank will continue to factor in the expectation of strong support from the majority owner, Government of India (GoI), and the bank's healthy resource profile. The ratings also factor in weak asset quality and earnings profile of the bank.

Analytical Approach

CRISIL has considered the standalone business and financial risk profiles of United Bank and has also factored in the strong support the bank expects from GoI, both on an ongoing basis and in the event of distress.

Key Rating Drivers & Detailed Description
Strengths:
* Expectation of support from GoI
In its ratings on PSBs, CRISIL continues to factor in support from 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 United Bank.
 
As a part of the Indradhanush framework, the government had 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. Further, in October 2017, the government had outlined a recapitalisation package of Rs 2.11 lakh crore over fiscals 2018 and 2019. In August 2019, the government announced the first found of capital infusion (Rs 55,250 crore) in 10 PSBs (of the total Rs 70,000 crore proposed for fiscal 2020). GoI infused Rs 4,998 crore in United Bank in fiscal 2019 and has announced Rs 1600 crore of capital infusion in the current fiscal.
 
* Healthy resource profile:
The proportion of current and savings account (CASA) deposits in total deposits remained high at 50.9% as on September 30, 2019 (51.5% as on March 31, 2019). Cost of deposit improved to 4.86% for the quarter ended September 30, 2019 from 4.96% for the corresponding period of the previous fiscal. The bank is expected to benefit from its well-established position in eastern and north-eastern India, and is likely to maintain a high CASA ratio supported by its stable deposit base in these regions.
 
Weaknesses:
* Weak asset quality:
Asset quality of the bank remains weak as reflected in elevated gross NPA ratio of 15.5% as on September 30, 2019 (16.5% as on March 31, 2019). Nevertheless, the same has come down from 22.7% as on September 30, 2018 supported by lower slippages and also write-offs of NPAs worth Rs 3800 crore in H2FY19. Slippages to NPAs have declined to 3.1% (annualised) for the half-year ended September 30, 2019 from 4.3% for fiscal 2019. Additionally, the bank is focusing on improving collection and recovery mechanism, and increasing the proportion of retail and SME loans in its portfolio. The bank also plans to focus on co-origination of priority sector loans on risk sharing basis to arrest slippages in the micro, small, and medium enterprise (MSME) sector. Ability to control slippages and increase the loan portfolio to less risky segments remain a key monitorable.
 
* Weak earnings:
Profitability has remained weak, over the past few years, on account of higher provisioning cost. However, the same has improved in fiscal 2020. Credit costs (annualised) for the half-year ended September 30, 2019 improved to 1.3% from 3.25% for the same period of the previous fiscal. It resulted in the bank reporting a profit after tax (PAT) of Rs 229 crore with a return on assets (RoA) of 0.3% (annualised) in the half-year ended fiscal 2020 as against a loss of Rs 1272 crore with an RoA of -1.8%(annualised) in the corresponding period of the previous fiscal (loss of Rs 2316 crore with an RoA of -1.6% in fiscal 2019). Nevertheless, provisioning coverage ratio of 53.4% as on September 30, 2019 was lower than that of peers. The ability of the bank to improve its asset quality, and hence profitability, is a key monitorable.
Liquidity Strong

The bank has strong liquidity, supported by a sizeable retail deposit base that forms a significant part of total deposits. Liquidity coverage ratio was 149.35% as on September 30, 2019, against the regulatory requirement of 100% while excess statutory liquidity ratio was Rs 9694.95 crore (7.22% of net demand and time liabilities). Liquidity also benefits from access to systemic sources of funds such as the liquidity adjustment facility from the Reserve Bank of India, access to the call money market, and refinance limits from sources such as National Housing Bank and National Bank for Agriculture and Rural Development.

Rating Sensitivity factors
Upward factors:
* Completion of the proposed amalgamation with PNB and OBC
* Improvement in asset quality and profitability on a sustained basis
 
Downward factors:
* Higher-than-expected deterioration in asset quality thereby impacting earnings profile
* Decline in capital adequacy ratio to below minimum regulatory requirements (including capital conservation buffer (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

United Bank is a mid-sized PSB, with assets of Rs 1.52 lakh crore and a network of more than 2000 branches as on September 30, 2019; its business is concentrated in the eastern and north-eastern regions of India. Total deposits and gross advances stood at Rs 1.34 lakh crore and Rs 0.74 lakh crore, respectively, as on September 30, 2019.
 
For fiscal 2019, United Bank reported a total income (net of interest expenses) of Rs 4359 crore and a net loss of Rs 2316 crore, against Rs 3707 crore and Rs 1454 crore, respectively, for fiscal 2018.
 
For first half of fiscal 2020, United Bank reported total income (net of interest expenses) of Rs 2703 crore and a net profit of Rs 229 crore, against total income (net of interest expenses) of Rs 1859 crore and a net loss of Rs 1272 crore for the corresponding period of the previous fiscal.

Key Financial Indicators
As on/for the period ended September 30, Unit 2019 2018
Total assets Rs crore 152587 142667
Total income (Net of interest expense) Rs crore 2703 1859
Profit after tax Rs crore 229 -1272
Gross NPA % 15.5 22.7
Overall capital adequacy ratio % 14.76 7.8
Return on assets % 0.3 -1.8

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.
Note on Tier-II instruments (Under Basel III)
The distinguishing feature of Tier-II capital instruments under Basel III, is the existence of point of non-viability (PONV) trigger, the occurrence of which may result in loss of principal to the investor and hence, to default on the instrument by the issuer. According to Basel III guidelines, the PONV trigger will be determined by the Reserve Bank of India (RBI) and is a remote possibility in the Indian context, given the robust regulatory and supervisory framework and systemic importance of the banking sector. Inherent risk associated with the PONV feature is adequately factored into the rating on the instrument.
 
Note on hybrid instruments Under Basel II
As hybrid capital instruments (Tier-I perpetual bonds and Upper Tier-II bonds; under Basel II) have characteristics that set them apart from Lower Tier-II bonds (under Basel II), ratings on the two instruments may not necessarily be identical. The factors that could trigger a default event for hybrid instruments include: the bank breaching the regulatory minimum capital requirement, or the regulator's denial of permission to the bank to make payments of interest and principal, if the bank reports losses. Hence, transition from one rating category to another may be significantly sharper for these instruments than for Lower Tier-II bonds, as debt servicing on hybrid instruments is far more sensitive to the bank's overall capital adequacy levels.
 
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size
(Rs crore)		 Rating outstanding
with outlook
INE695A08048 Tier II bonds
(Under Basel III)		 27-Sep-17 10.50 27-Sep-27 150 CRISIL A+/Watch Positive
INE695A08063 Tier II bonds
(Under Basel III)		 10-Nov-17 9.05 10-Nov-27 340 CRISIL A+/Watch Positive
INE695A08030 Tier II bonds
(Under Basel III)		 23-Aug-17 9.00 (annual) 23-Aug-27 500 CRISIL A+/Watch Positive
INE695A09103 Tier II bonds
(Under Basel III)		 25-Jun-13 8.75 (annual)
25-Jun-23		 500 CRISIL A+/Watch Positive
INE695A09087 Lower tier II bonds
(Under Basel II)		 28-Dec-11 9.20 (annual) 28-Dec-21 200 CRISIL A+/Watch Positive
NA Tier II bonds
(Under Basel III)#		 NA NA NA 10 CRISIL A+/Watch Positive
INE695A09095 Perpetual Tier-I Bonds (under Basel II) 05-Dec-12 9.27 (annual) Perpetual 300 CRISIL A-/Watch Positive
#yet to be issued
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Certificate of Deposits  ST    --    --  31-08-18  Withdrawal  12-12-17  CRISIL A1+  10-03-16  CRISIL A1+  CRISIL A1+ 
            25-01-18  CRISIL A1+  15-09-17  CRISIL A1+       
                02-08-17  CRISIL A1+       
                17-03-17  CRISIL A1+       
Lower Tier-II Bonds (under Basel II)  LT  200.00
19-12-19  		CRISIL A+/(Watch) Positive  05-09-19  CRISIL A+/Stable  22-11-18  CRISIL AA-/Watch Negative  12-12-17  CRISIL AA-/Negative  10-03-16  CRISIL AA-/Negative  CRISIL AA-/Negative 
        22-02-19  CRISIL A+/Stable  31-08-18  CRISIL AA-/Stable  15-09-17  CRISIL AA-/Negative       
            25-01-18  CRISIL AA-/Stable  02-08-17  CRISIL AA-/Negative       
                17-03-17  CRISIL AA-/Negative       
Perpetual Tier-I Bonds (under Basel II)  LT  300.00
19-12-19  		CRISIL A-/(Watch) Positive  05-09-19  CRISIL A-/Stable  22-11-18  CRISIL A/Watch Negative  12-12-17  CRISIL A/Negative  10-03-16  CRISIL A/Negative  CRISIL A/Negative 
        22-02-19  CRISIL A-/Stable  31-08-18  CRISIL A/Stable  15-09-17  CRISIL A/Negative       
            25-01-18  CRISIL A/Stable  02-08-17  CRISIL A/Negative       
                17-03-17  CRISIL A/Negative       
Tier I Bonds (Under Basel III)  LT    --    --  22-11-18  Withdrawal  12-12-17  CRISIL BBB+/Negative    --  -- 
            31-08-18  CRISIL BBB+/Negative  15-09-17  CRISIL BBB+/Negative       
            25-01-18  CRISIL BBB+/Negative           
Tier II Bonds (Under Basel III)  LT  1490.00
19-12-19  		CRISIL A+/(Watch) Positive  05-09-19  CRISIL A+/Stable  22-11-18  CRISIL AA-/Watch Negative  12-12-17  CRISIL AA-/Negative  10-03-16  CRISIL AA-/Negative  CRISIL AA-/Negative 
        22-02-19  CRISIL A+/Stable  31-08-18  CRISIL AA-/Stable  15-09-17  CRISIL AA-/Negative       
            25-01-18  CRISIL AA-/Stable  02-08-17  CRISIL AA-/Negative       
                17-03-17  CRISIL AA-/Negative       
All amounts are in Rs.Cr.
Links to related criteria
Rating Criteria for Banks and Financial Institutions
Criteria for Notching up Stand Alone Ratings of Entities Based on Government Support
Rating Criteria for Hybrid Capital instruments issued by banks under Basel II guidelines
Rating criteria for Basel III - compliant non-equity capital instruments

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