Beyond Bad loans :ICRA downgrades United Bank's Tier-II bonds, CDs

BS Reporter  |  Mumbai  February 14, 2014 Last Updated at 00:47 IST
Sharp rise in bad loans, rising losses lead to action

 Rating agency ICRA announced on Thursday a downgrading of United Bank of India (UBI)’s capital bonds (Tier-II) and certificates of deposit (CDs), due to a higher than expected deterioration in asset quality, pressures on margins and profitability.

The ratings have been put on a watch with negative implications, ICRA stated. It cut the rating for lower Tier-II bonds from AA- to A-. The rating for CDs has been downgraded from A1+ to A2+.

ICRA said the revision reflected the considerably higher than expected deterioration in asset quality. Gross non-performing assets (NPAs) rose sharply to 10.82 per cent as on December 30, against 7.52 per cent as on September 30, 2013. The vulnerable portfolio also includes standard restructured advances, 5.25 per cent of the total as on December 31.

The Kolkata-based public sector lender also saw pressure building on its earnings, as it posted a net loss of Rs 1,238 crore in the quarter ended December. It had a loss of Rs 489 crore in the earlier one. Its capital adequacy ratio also declined to 9.01 per cent in December as against 9.48 per cent in September. The Tier-I capital was 5.59 per cent at end-December, down from 6.18 per cent in September.  The government had injected Rs 700 crore as equity in the third quarter.

On February 11, Fitch, another rating agency, warned UBI’s recent losses might result in the state-run lender's capital ratios falling below the regulatory minimum and test the regulator's approach to the Basel-III capital rules. This is likely to be the first such instance within Asia since implementation of the Basel-III framework. It is also important at this time because a number of Indian banks, mostly state-owned, are considering raising of fresh regulatory capital in the international market, due to capital pressures on the sector, the rating agency had said.

ICRA said UBI would continue to post losses, given its large unprovided NPAs (with net NPA of 7.44 per cent as of December) and its higher NPA generation rate, which would further exert pressure on its capitalisation and solvency ratio. The net loss for  April-December 2013 was Rs 1,683 crore, as against a profit of Rs 361 crore a year before.

CRISIL downgrade

In a related development, rating agency CRISIL also downgraded rating for UBI’s Tier-II bonds (under Basel-II norms) from “AA” to “AA-” and Tier-I perpetual bonds from “AA-“ to “A”.

The downgrade on the Tier-II Bonds reflects the continued and higher than expected weakening in United Bank's asset quality and earnings profile, CRISIL said in statement.

ICRA ratings continue to be based on the high likelihood of timely support from the Government of India (GOI). A lack of support from the government could trigger a further downgrade of the rating.  

The ratings have been put on watch with negative implications as ICRA will be closely monitoring what is being done to shore up the bank’s capital.  The amount and timing of support from GOI and the bank’s ability to arrest further losses due to a worsening asset quality would have a critical bearing on its credit profile.