Rating Rationale
February 22, 2019 | Mumbai
United Bank of India
Ratings downgraded to 'CRISIL A+/CRISIL A-/Stable' ; removed from 'Watch Negative' 
 
Rating Action
Rs.500 Crore Tier II Bonds (Under Basel III) CRISIL A+/Stable (Downgraded from 'CRISIL AA-' ; Removed from 'Rating Watch with Negative Implications')
Rs.500 Crore Tier II Bonds (Under Basel III) CRISIL A+/Stable (Downgraded from 'CRISIL AA-' ; Removed from 'Rating Watch with Negative Implications')
Rs.500 Crore Tier II Bonds (Under Basel III) CRISIL A+/Stable (Downgraded from 'CRISIL AA-' ; Removed from 'Rating Watch with Negative Implications')
Rs.200 Crore Lower Tier-II Bonds (under Basel II) CRISIL A+/Stable (Downgraded from 'CRISIL AA-' ; Removed from 'Rating Watch with Negative Implications')
Rs.300 Crore Perpetual Tier-I Bonds (under Basel II) CRISIL A-/Stable (Downgraded from 'CRISIL A' ; Removed from 'Rating Watch with Negative Implications')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has removed its ratings on the debt instruments of United Bank of India (United Bank) from 'Rating Watch with Negative Implications' and downgraded the ratings to 'CRISIL A+/CRISIL A-' from 'CRISIL AA-/CRISIL A' and assigned a 'Stable' outlook to the debt instruments.
 
CRISIL had, in November 2018, placed the ratings on 'Watch with Negative Implications' as the bank reported lower capital ratios than regulatory requirement (excluding capital conservation buffer) for the quarter ended September 30, 2018. The bank had reported Tier I and overall capital adequacy ratios of 5.82% and 7.82%, respectively, as on September 30, 2018 (9.87% and 12.62%, respectively, as on March 31, 2018) as against regulatory requirement (excluding capital conservation buffer) of 7% and 9%, respectively. The watch resolution follows improvement in the bank's Tier I and overall capital adequacy ratios to 7.10% and 9.99%, respectively, as on December 31, 2018, post capital infusion of Rs 2159 crore in December 2018 by the Government of India (GoI). Further, on February 20, 2019, GoI announced its plan to infuse additional capital of Rs 2839 crore in the bank.
 
The ratings have been downgraded as the profitability of the bank has remained weaker than earlier expectations. The bank reported a net loss of Rs 2411 crore for the nine months ended December 31, 2018 against a loss of Rs 1194 crore for the corresponding period of the previous fiscal. The profitability is expected to remain weak in the near term due to higher provisioning costs. The bank's provisioning coverage ratio (excluding technical write-offs) of 49.18% as on December 31, 2018, was also lower than the industry average. Furthermore, the asset quality, while improving, continues to remain weak as reflected in gross non-performing assets (NPAs) of 21.27% as on December 31, 2018.
 
The 'Stable' outlook reflects the strength of the bank's healthy resource profile and established market position in rural and semi-urban area in eastern India, which should support the current rating over the medium term. Current account and savings account (CASA) deposits accounted for 49.5% of total deposits as on December 31, 2018. The outlook also factors in the expectation of gradual improvement in asset quality and profitability supported by expected recoveries from NCLT (National Company Law Tribunal) accounts. The ratings continue to be driven by expectation of strong support from the majority owner, the GoI.

Analytical Approach

For arriving at the ratings, CRISIL has considered the standalone business and financial risk profiles of United Bank, and factored in the strong support the bank is expected to receive from its majority owner, the 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
Strengths
* Strong expectation of support from GoI
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 United Bank. The Bank received Rs 2,634 crore in fiscal 2018 and Rs 4998 crore crore in fiscal 2019 (including Rs 2839 crore announced on February 20, 2019).

* Healthy resource profile
The proportion of CASA deposits in total deposits remained high at 49.49% as on December 31, 2018 (48.44% as on March 31, 2018). Cost of deposit improved to 4.99% for the quarter ended December 31, 2018 from 5.30% 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.

Weakness
* Weak asset quality
Asset quality of the bank continues to remain weak as reflected in gross NPA ratio of 21.27% as on December 31, 2018 (24.10% as on March 31, 2018). Though slippages to NPAs declined to 4.97% (annualised) for the nine months ended December 31, 2018 from 7.81% for the corresponding period of the previous fiscal, it continues to remain elevated. The bank is focusing on improving collection and recovery mechanism, and increasing the proportion of retail and small and medium enterprise (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 remains a key monitorable.

* Weak earnings
Profitability remains weak on account of higher provisioning cost. Net loss and return on assets (annualised) stood at Rs 2411 crore and negative 2.24%, respectively, for nine months ended December 31, 2018 (Rs 1194 crore and negative 1.14%, respectively, for the corresponding period of the previous fiscal). Credit costs (annualised) for the nine months ended December 31, 2018 increased to 3.99% from 2.46% for the same period of the previous fiscal. Furthermore, provisioning coverage ratio of 49.18% as on December 31, 2018 was lower than that of peers. The bank's provisioning cost will remain high in the near term on account of ageing of NPAs and hence its profitability is likely to remain under pressure over the medium term.
Liquidity

The bank has adequate liquidity, supported by a sizeable retail deposit base that forms a significant part of total deposits. Liquidity coverage ratio was 272.81% as on December 31, 2018, against the regulatory requirement of 90% while excess statutory liquidity ratio was Rs 845.39 crore (6.49% of net demand and time liabilities). The 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.

Outlook: Stable

CRISIL believes United Bank will continue to benefit from strong government support and maintain its healthy resource profile. The outlook may be revised to 'Positive' if there is a substantial and sustained improvement in earnings and asset quality. The ratings may be downgraded if there is higher than expected deterioration in earnings or asset quality or if capital position weakens significantly. 

About the Bank

United Bank is a mid-sized PSB, with assets of Rs 1.43 lakh crore and a network of more than 2000 branches as on December 31, 2018; its business is concentrated in the eastern and north-eastern regions of India. Total deposits and gross advances stood at Rs 1.29 lakh crore and Rs 0.69 lakh crore, respectively, as on December 31, 2018.
 
For fiscal 2018, United Bank reported total income (net of interest expenses) of Rs 3707 crore and a net loss of Rs 1454 crore, against total income (net of interest expenses) of Rs 4114 crore and a net loss of Rs 220 crore for fiscal 2017. For the nine months ended December 31, 2018, the bank reported a net loss of Rs 2411 crore against a net loss of Rs 1194 crore for the corresponding period of the previous fiscal.

Key Financial Indicators
As on/for the period ended December 31, Unit 2018 2017
Total assets Rs Cr. 142802 1,40,226
Total Income (Net of Interest Expense) Rs Cr. 3,018 2,747
Profit after tax Rs Cr. -2,411 -1,194
Gross NPA % 21.27 20.1
Overall capital adequacy ratio % 9.99 10.98
Return on assets % -2.24 -1.14

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.Cr) Rating outstanding
with outlook
INE695A08048 Tier II bonds
(Under Basel III)		 27-Sep-2017 10.50 27-Sep-2027 150 CRISIL A+/Stable
INE695A08063 Tier II bonds
(Under Basel III)		 10-Nov-2017 9.05 10-Nov-2027 340 CRISIL A+/Stable
INE695A08030 Tier II bonds
(Under Basel III)		 23-Aug-17 9.00 (annual) 23-Aug-2027 500 CRISIL A+/Stable
INE695A09103 Tier II bonds
(Under Basel III)		 25-Jun-2013 8.75 (annual)
25-Jun-2023		 500 CRISIL A+/Stable
INE695A09087 Lower tier II bonds
(Under Basel II)		 28-Dec-2011 9.20 (annual) 28-Dec-2021 200 CRISIL A+/Stable
NA Tier II bonds
(Under Basel III)#		 NA NA NA 10 CRISIL A+/Stable
INE695A09095 Perpetual Tier-I Bonds (under Basel II) 05-Dec-2012 9.27 (annual) Perpetual 300 CRISIL A-/Stable
#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
22-02-19  		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 
            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
22-02-19  		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 
            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
22-02-19  		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 
            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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