Union Bank of India
Rating reaffirmed at 'CRISIL AA+ , CRISIL AA- '; outlook revised to 'Stable' Rating Action
1 crore = 10 million Refer to annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has revised its outlook on the long-term debt instruments of Union Bank of India (Union Bank) to ‘Stable’ from ‘Negative’ while reaffirming its ratings at ‘CRISIL AA+/CRISIL AA-’.
CRISIL Ratings has also withdrawn its rating on the Tier-II Bond Issue (Under Basel III) of Rs. 500 crore (See Annexure 'Details of Rating Withdrawn' for details) in-line with its withdrawal policy. CRISIL has received independent verification that these instruments are fully redeemed.
CRISIL Ratings had assigned Negative outlook on the long-term debt instruments on September 01, 2020, following resolution of ‘Watch with Developing Implications’. The Negative outlook was assigned to reflect the potential stress that the bank's asset quality and, consequently, profitability could witness on account of the challenging macro environment.
The revision in the outlook to Stable factors in better-than-expected performance of the bank amid the current challenging macro environment. Profitability of the bank has witnessed an improvement with the bank reporting profit after tax (PAT) of Rs 1,576 crore in the nine months ended fiscal 2021, against substantial loss of Rs 6,614 crore in fiscal 2020. At the same time, provision coverage ratio (PCR) has also increased to 71% as on December 31, 2020 (coverage on pro-forma gross non-performing assets [NPAs], excluding the Supreme Court dispensation on asset classification) from 68% as on March 31, 2020. The bank’s capital position has also strengthened, supported by raising Rs 1,700 crore of Tier 1 bonds and Rs 2,000 crore of Tier 2 bonds in fiscal 2021, so far. As a result, the bank’s common equity tier (CET)-1 ratio, Tier-I capital adequacy ratio (CAR) and overall CAR improved to 9.2%, 10.5% and 13.0%, respectively, as on December 31, 2020, from 8.6%, 9.8% and 12.1% as on March 31, 2020.
Overall asset quality has been supported by various schemes launched by the Government of India and the Reserve Bank of India (RBI). Nevertheless, Union Bank’s pro-forma gross NPAs remained high at 15.28% as on December 31, 2020 (14.6% as on March 31, 2020). Reported gross NPAs on the same date, was 13.5%. The one-time restructuring scheme is expected to benefit reported NPA metrics. The bank plans to restructure around 3% of its advances.
The ratings continue to factor in expectation of strong support from its majority owner, the Government of India and its sizeable scale of operations. It also factors in the modest asset quality and earnings profile of the bank. The ‘CRISIL AA-/Stable’ rating on Tier I bonds (under Basel III) factors in the adequacy of Union Bank's eligible reserves to service coupon after adjusting for any medium-term impact of profitability on the bank's reserves position in a stress scenario.
While economic activity has started picking up, any sudden surge in Covid-19 cases leading to partial lockdowns could negatively impact the collections. Hence, the bank’s asset quality and its consequent impact on earnings profile will continue to be closely monitored. |
Analytical Approach For arriving at the ratings, CRISIL Ratings has considered the consolidated business and financial risk profiles of Union Bank and its subsidiaries. CRISIL Ratings has also factored in the strong support that the bank is expected to receive from its majority owner, the central government, both on an ongoing basis and in the event of distress.
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths:
The ratings continue to factor in expectation of strong government support. This is because the central government 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 the government to support PSBs, including Union Bank. Any material change in shareholding by GoI and/or privatisation of the bank in line with Finance Minister’s announcement in the recent budget for privatisation of two PSBs will be a key rating sensitivity factor.
The bank also has flexibility to raise additional equity from the market, with the central government stake at 89.1% as on December 31, 2020. The bank has raised Rs 1,700 crore of Tier 1 and Rs 2,000 crore of Tier 2 bonds in the current fiscal. It is also in the process of raising additional capital in the coming quarters. The bank’s CET-1 ratio, Tier-I CAR and overall CAR stood at 9.2%, 10.5% and 13.0%, respectively, as on December 31, 2020 (8.6%, 9.8% and 12.1% as on March 31, 2020).
Union Bank is the fourth-largest PSB by asset size, as on December 31, 2020. Its share in deposits and advances in the domestic banking system was 6.2% and 6.1%, respectively, as on December 31, 2020. The bank has 45% of its total advances in the form of loans to corporates followed by retail (18%), micro, small and medium enterprises (19%) and agriculture (18%). Within retail, housing loans constituted almost 54% of the loan book.
The bank benefits from its sizeable branch network of 9,587 as on December 31, 2020, and wide reach in rural and semi-urban areas, which facilitates access to low-cost, stable resource base. As on December 31, 2020, current account and savings account (CASA) deposits-to-total deposit ratio was 35.4% (34.1% in March 31, 2020). While this 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:
The bank’s asset quality, with reported and pro-forma gross NPAs of 13.5% and 15.3%, respectively, as on December 31, 2020 (14.6% as on March 31, 2020) remains modest. Around 61% of the pro-forma NPAs are contributed by large corporates, which have pro-forma gross NPAs of around 19% as on December 31, 2020 (19.5% as on March 31, 2020). As on December 31, 2020, retail, agriculture and micro-and-small segments had pro-forma gross NPAs of around 6%, 13% and 18%, respectively.
The pro-forma slippages for the bank also remained high at 3.2% (annualised; Rs 14,370 crore) of opening net advances for the nine months ended December 31, 2020. However, it has improved from slippages of 4.1% (Rs 23,580 crore) and 4.5% (Rs 25,135 crore) witnessed in fiscal 2020 and fiscal 2019, respectively. Furthermore, the bank restructured accounts worth 0.5% of advances till December 31, 2020, which is expected to increase to around 3%.
Nevertheless, asset quality of the bank, as well as performance of the restructured accounts and ability of the management to contain slippages to NPAs and improve recoveries will remain key monitorables in the near to medium term.
Profitability, for the last few years, had been constrained primarily by high provisioning costs taken by the bank. The amalgamated bank is estimated to have reported a net loss of Rs 6,614 crore (with a negative return on assets [RoA] of 0.7%) for fiscal 2020, against net loss of Rs 12,066 crore (with negative RoA of 1.3%) for fiscal 2019.
However, the profitability of the bank improved in fiscal 2021 with profit of Rs 1,576 crore with RoA of 0.2% for the nine months ended fiscal 2020, driven by lower provisioning costs of 1.7% (annualised; Rs 14,079 crore) against provisioning costs of 2.5% (Rs 24,317 crore) of average assets for fiscal 2020. PCR on the pro-forma NPAs of the bank continues to remain high at around 71% as on December 31, 2020 (78% on reported NPAs on the same date).
Supported by cost rationalisation measures, operating expenses improved to 1.6% of average assets for the nine months ended fiscal 2021, from 1.8% in fiscal 2020. Pre-provisioning profits of the bank were stable at 1.8% for the nine months ended fiscal 2021 (1.8% for fiscal 2020).
Nevertheless, improvement and sustainability of the profits will remain a key rating sensitivity factor. |
Liquidity: Strong Liquidity should remain comfortable, supported by strong retail deposit base. Liquidity coverage ratio stood at 179%, which is well above the minimum regulatory requirement as on December 31, 2020. Excess investments eligible for statutory liquidity ratio was Rs 69,880 crore (7.8%) as on December 31, 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: Stable Union Bank should continue to benefit from strong government support and its large size and scale. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Bank Incorporated in 1919 in Mumbai, Union Bank was nationalised in 1969. The government’s ownership stood at 89.1% as on December 31, 2020, post issuing shares under amalgamation to the shareholders of Andhra Bank and Corporation Bank.
Amalgamation of Andhra Bank and Corporation Bank into Union Bank was effective from April 1, 2020. Post amalgamation, the merged entity enjoys the benefits of larger balance sheet and wider geographical reach. As on December 31, 2020, Union Bank is the fourth largest PSB with total assets of Rs 1,033,346 crore and strong domestic branch network comprising 9,587 branches and 13,239 automated teller machines.
The bank reported a profit of Rs 1,576 crore on total income (net of interest expense) of Rs 26,072 crore in the nine months ended December 31, 2020, against Rs 543 crore and Rs 25,741 crore, respectively, in the corresponding period of the previous year. |
Key Financial Indicators
Note: Income statement numbers/ratios for FY20 represents pro-forma merged entity financials |
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 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. |
Annexure - Details of Instrument(s)
^yet to be issued
Annexure - Details of Rating Withdrawn
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Annexure – List of entities consolidated
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