Union Bank of India Tier I Bonds (Under Basel III) rating upgraded to 'CRISIL AA/Stable'; Infrastructure Bonds and Upper Tier-II Bonds (under Basel II) withdrawn
Rating Action
1 crore = 10 million Refer to annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has upgraded its rating on the Tier I bonds (under Basel III) of Union Bank of India (Union Bank) to ‘CRISIL AA/Stable’ from ‘CRISIL AA-/Stable’. CRISIL Ratings has also reaffirmed its ‘CRISIL AA+/Stable’ ratings on the Tier II Bonds (under Basel III) and Lower Tier II bonds (under Basel II)
CRISIL Ratings has also withdrawn its rating on Rs 2000 crore of Tier II bonds (under basel III), Rs 500.1 crore of Infrastructure bonds, Rs 900 crore of Tier I bonds (under basel III) and Rs 250 crore Upper Tier 2 bond (under basel II) (See Annexure 'Details of Rating Withdrawn' for details) in-line with its withdrawal policy. CRISIL Ratings has received independent verification that these instruments are fully redeemed.
The upgrade in the rating of Tier I bonds (under Basel III) factors in improved position of Union Bank to make future coupon payments, supported by the capital raise and an adjustment of accumulated losses with share premium account in fiscal 2021. Pursuant to the adjustment, the eligible reserve to total assets ratio for the bank has improved. Other public sector banks (PSBs) have also utilized the provision of adjustment of accumulated losses with share premium account. This provision is part of the Department of Financial Services Gazette notification no. CG-DL-E-23032020-218862 (S.O. 1200 E) dated 23.03.2020 referred to as Nationalised Banks (Management and Miscellaneous Provisions) Amendment Scheme, 2020. As part of the same, the bank still has share premium reserves which can be utilised to set off any losses in future, and this supports the credit profile of tier I (under Basel III) instruments. However, any substantial depletion of the share premium account or any regulatory changes to appropriation of the share premium account pertaining to adjustment of accumulated losses are key monitorables.
Supported by the regular capital infusion made by the Government of India (GoI), equity raised via qualified institutional placements (QIP) and improved accruals, Union Bank’s capital ratios have improved, as reflected in tier 1 and overall capital to risk-weighted adequacy ratio (CRAR) of 11.1% and 13.3%, respectively, as on June 30, 2021 as against 9.5% and 11.6%, respectively, as on June 30, 2020 (10.4% and 12.6%, respectively, as on March 31, 2021).
The overall ratings continue to reflect the expectation of strong support from the majority stakeholder, GoI, and the bank’s sizeable scale of operations. These strengths are partially offset by modest asset quality and modest, albeit improving, earnings profile.
In line with relief measures announced by the Reserve Bank of India (RBI) during the Covid-19 pandemic, Union Bank had provided a moratorium to its borrowers. Though collections declined during the initial months, they have inched up subsequently. However, the second wave of the pandemic led to intermittent lockdowns and localised restrictions, thus impacting collections once again. Although the impact has been moderate during this phase, any adverse change in payment discipline of borrowers may lead to higher delinquencies.
Under the schemes announced by the RBI dated January 1, 2019, February 11, 2020 and August 6, 2020, and the resolution framework 1.0 for stressed accounts, Union Bank had restructured 2.3% of gross advances as on June 30, 2021. Pursuant to RBI’s resolution framework 2.0 in May 2021, restructuring stands at 0.6% of gross advances; the ratio could be higher and is still under review. Nevertheless, the ability of the bank to manage collections and asset quality going forward this fiscal, is a key monitorable. Going forward too, the impact of the third wave of the pandemic, if and when it comes in terms of its spread, intensity and duration, will also 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 83.5% as on June 30, 2021. The bank has raised Rs 1,705 crore of Tier 1 and Rs 2,000 crore of Tier 2 bonds in the fiscal 2021 and Rs 2000 crore of Tier II bonds in fiscal 2022 till now. The bank has also completed its QIP of Rs 1447 crore in May 2021. The bank’s CET-1 ratio, Tier-I CAR and overall CAR stood at 9.8%, 11.1% and 13.3%, respectively, as on June 30, 2021 (9.1%, 10.4% and 12.6% as on March 31, 2021).
Union Bank is among the larger PSBs with share in deposits and advances in the domestic banking system at ~6% each as on June 30, 2021. The bank has 45% of its total advances in the form of loans to corporates followed by retail (20%), micro, small and medium enterprises (17%) and agriculture (18%). Within retail, housing loans constituted almost 53% of the loan book.
The bank benefits from its sizeable branch network of more than 9,300 as on June 30, 2021, and wide reach in rural and semi-urban areas, which facilitates access to low-cost, stable resource base. As on June 30, 2021, current account and savings account (CASA) deposits-to-total deposit ratio was 36.4% (33.3% as on June 30, 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 gross NPAs of 13.6% as on June 30, 2021 (13.7% as on March 31, 2021 and 14.6% as on March 31, 2020) remains modest. Around 49% of the NPAs are contributed by large corporates, which have gross NPAs of around 14.7% as on June 30, 2021 (16.2% as on March 31, 2021). The same has come down from 19.5% as on March 31, 2020 – largely on account of write-offs. As on June 30, 2021, retail, agriculture and micro-and-small segments had gross NPAs of around 5%, 13% and 21%, respectively. Slippages for the bank improved in fiscal 2021 at 2.9% (Rs 17443 crore) as against 4.1% (Rs 23,580 crore) and 4.5% (Rs 25,135 crore) witnessed in fiscal 2020 and fiscal 2019, respectively. However, the same increased to 4.8% (annualised; Rs 7049 crore) of opening net advances for the quarter ended June 30, 2021 – driven the impact of second wave of Covid-19. MSME segment accounted for 45% of the slippages followed by agriculture and corporate segment at 20% each. Furthermore, the bank’s standard restructured accounts were at 2.90% of advances as on June 30, 2021, which is expected to marginally increase by ~20-30 basis till September 30, 2021
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. However, the profitability of the bank improved in fiscal 2021 with profit of Rs 2905 crore with return on assets (RoA) of 0.3% as against an estimated loss of 6,614 crore (with a negative return on assets RoA of 0.7%) for the amalgamated bank for fiscal 2020. The improvement was driven by improvement in credit costs, which improved to 1.6% (Rs 16860 crore) of average assets in fiscal 2021 as against an estimated 2.5% (Rs 24317 crore) in fiscal 2020. Further, supported by cost rationalisation measures, operating expenses improved to 1.6% of average assets for fiscal 2021, from 1.8% in fiscal 2020.
For the quarter ended June 30, 2021, the bank reported a PAT of Rs 1181 crore with an RoA of 0.4%. Credit costs of the bank moderated to 1.3% (annualised; Rs 3524 crore) of average assets for the quarter ended June 30, 2021. PCR (excluding the technical write-offs) of the bank continues to remain high at around 68.7% as on June 30, 2021 (69.6% as on March 31, 2021).
Nevertheless, improvement and sustainability of the profitability will remain a key rating sensitivity factor. |
Liquidity: Strong Liquidity should remain comfortable, supported by strong retail deposit base. Liquidity coverage ratio stood at 168%, which is well above the minimum regulatory requirement as on June 30, 2021, 2020. Excess investments eligible for statutory liquidity ratio was Rs 88469 crore (9.55%) as on June 30, 2021. 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 83.5% as on June 30, 2021, 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 June 30, 2021, Union Bank is one of the top five largest PSBs with total assets of Rs 1064937 crore and strong domestic branch network comprising 9300+ branches and 11800+ automated teller machines.
The bank reported a profit of Rs 1181 crore on total income (net of interest expense) of Rs 9914 crore for the quarter ended June 30, 2021, against Rs 332 crore and Rs 7865 crore, respectively, in the corresponding period of the previous year. |
Key Financial Indicators
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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)
Annexure - Details of Rating Withdrawn
^yet to be issued |
Annexure – List of entities consolidated
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Criteria Details
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