| UCO Bank | ||||
| Rating Reaffirmed; Lower Tier-II Bonds (under Basel II) Withdrawn | ||||
| Rating Action | ||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||
| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its short-term rating on the certificate of deposit programme of UCO Bank at ‘CRISIL A1+’.
CRISIL Ratings has also withdrawn its long-term rating on the Rs 1,000 crore Lower Tier-II bonds (Basel II) at the bank’s request as the same is redeemed on maturity and on receipt of confirmation from the debenture trustee (see Annexure - Details of Rating Withdrawn). The withdrawal is in line with CRISIL Ratings’ withdrawal policy.
The rating factors in the enhancement in asset quality and profitability of the bank. Asset quality improved with reported gross non-performing assets (NPAs) at 4.78% as on March 31, 2023 (4.48% as on June 30, 2023), from 7.89% a year earlier, supported by lower slippages. Net NPAs declined substantially and stood at 1.18% as on June 30, 2023. As on March 31, 2023, restructured advances accounted for 2.9% of the bank portfolio.
Improvement in asset quality led to better profitability. Return on asset (RoA) increased to 0.65% in fiscal 2023 (0.30% annualised for the three months ended June 30, 2023) from 0.36% in fiscal 2022 since credit cost reduced to 0.51% from 1.17%.
The overall rating continues to reflect the expectation of strong support from the Government of India (GoI) and moderate resource profile. These strengths are partially offset by average, albeit improving, asset quality and earnings |
Analytical Approach CRISIL Ratings has considered the standalone business and financial risk profiles of UCO Bank and has factored in the expected strong government support. |
Key Rating Drivers & Detailed Description Strengths: Expectation of strong support from GoI The government should continue to provide strong support both on an ongoing basis and in the event of distress. 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, considering the sector’s criticality to the economy, the strong public perception of sovereign backing for PSBs, and adverse implications of any PSB failure, in terms of political fallout, systemic stability, and investor confidence. The majority ownership creates a moral obligation on the government to support PSBs, including UCO Bank.
GoI has supported UCO Bank with infusion of Rs 22,645 crore over fiscals 2016-2022. Of this, Rs 2,600 crore was infused in fiscal 2021; consequently, tier 1 and capital-to-risk weighted assets ratio (CRAR) were at 11.14% and 13.74%, respectively, as on March 31, 2021. Tier 1 and CRAR have shown healthy year on year (y-o-y) growth and were 13.96% and 16.51%, respectively, as on March 31, 2023, supported by growth in profitability. Tier 1 and CRAR were 14.16% and 16.85%, respectively, as on June 30, 2023.
Moderate resource profile Total deposits increased 11% y-o-y to Rs 2,49,338 crore as on March 31, 2023 (Rs 2,49,694 crore as on June 30, 2023). Ratio of current account and savings account (CASA) deposits to total deposits was 36.70% as on June 30, 2023, and 36.79% as on March 31, 2023. Of the CASA deposits, saving deposits accounted for 89%, and current deposits for the remaining 11%. Additionally, cost of deposits inched up to 4.06% in fiscal 2023 from 3.81% in fiscal 2022.
The bank should maintain its resource profile, supported by its established market position in eastern India, which has helped maintain a stable deposit base.
Weakness: Average, albeit improving, asset quality and profitability Asset quality remains average, albeit it improved in fiscal 2023 with gross NPAs at 4.78% as on March 31, 2023, (4.48% as on June 30, 2023), as compared with 7.89% a year ago. The improvement was driven by lower slippages of Rs 2,096 crore in fiscal 2023 from Rs 6,123 crore in fiscal 2022 (Rs 536 crore in the first three months of fiscal 2024). Slippages to net advances were 1.71% in fiscal 2023 and 1.38%[1] in the three months ended June 30, 2023. Majority of stress in the corporate book is already recognised, and fresh slippage in this segment is expected to be relatively low. As on March 31, 2023, restructured advances accounted for 2.9% of the bank portfolio, and NPAs in the restructured book were 13.44%. Net NPAs were 1.29%% as on March 31, 2023, (1.18% as on June 30, 2023) from 2.7% a year ago.
The strategy to grow more granular assets in the retail, and micro, small and medium enterprise (MSME) segments, and adoption of a conservative approach while lending to corporates, augurs well for the asset quality. Also, the increasing proportion of high-yield retail, agriculture, and MSME segments have resulted in steady improvement in net interest margin to 2.58% in fiscal 2023 (2.65% for the three months ended June 30, 2023) from 2.48% in fiscal 2022. Profitability has further benefitted from lower credit cost, which reduced to 0.51% from 1.17%% for the same comparative period. RoA was 0.65% in fiscal 2023, up from 0.36% in fiscal 2022, and net profit was Rs 1,862 crore from Rs 930 crore.
Net profit was Rs 223 crore (annualised RoA 0.30%) during the three months ended June 30, 2023. Bank maintained a healthy provision cover of 74.5% as on June 30, 2023.
Nevertheless, the ability to manage collections and control credit costs, particularly that from the restructured book, and improving profitability will remain key monitorables. [1]Annualised, Slippage ratio= Slippages in Q1FY24/ Net Advances as on March 31, 2023 |
Liquidity: Strong Liquidity remains supported by the strong retail deposit base. The liquidity coverage ratio stood at 178.9% as on March 31, 2023 and was higher than the regulatory requirement. The excess statutory liquidity stood at Rs 23,518 crore (around 9.61% of net demand and time liabilities) as on March 31, 2023. Liquidity benefits from access to systemic sources of funds, such as the liquidity adjustment facility from the Reserve Bank of India and call money market.
ESG profile CRISIL Ratings believes the Environment, Social and Governance (ESG) profile of UCO Bank supports its already strong credit risk profile.
The ESG profile for financial sector entities typically factors in governance as a key differentiator. The sector has a reasonable social impact because of its substantial employee and customer base and can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, the lending decisions may have a bearing on the environment.
UCO Bank has an ongoing focus on strengthening the various aspects of its ESG profile.
Key ESG highlights of UCO Bank:
There is growing importance of ESG among investors and lenders. The commitment of UCO Bank to ESG will play a key role in enhancing stakeholder confidence, given shareholding by foreign portfolio investors and access to domestic capital markets |
Rating Sensitivity Factors Downward Factors
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About the Bank UCO Bank was founded in 1943 as United Commercial Bank. It was renamed as UCO Bank by an Act of Parliament in 1985. In 2003, the bank made its initial public offering, resulting in dilution of government ownership. GoI owned 95.39% stake in the bank as on June 30, 2023. As on June 30, 2023, the bank had total advances and deposits of Rs 1,64,278 crore and Rs 2,49,694 crore, respectively.
Profit after tax (PAT) was Rs 1,862 crore and total income (net of interest expenses) was Rs 9,852 crore in fiscal 2023, as against a net profit of Rs 930 crore and total income (net of interest expenses) of Rs 9,574 crore for fiscal 2022. |
Key Financial Indicators
*annualised |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
Annexure - Detail of Rating Withdrawn
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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