Now, UCO Banks bonds downgraded

The season of downgrades for banks just got extended. Rating agency ICRA on Wednesday cut the rating for Kolkata-based UCO Bank’s lower Tier-II bonds from “AA+” to “AA” due to deterioration in asset quality and weak solvency profile.

ICRA had already lowered the rating for Oriental Bank of Commerce’s bonds for increase in non-performing assets. Global rating agency Moody’s has also downgraded the rating for some instruments of Union Bank of India and Bank of India.

ICRA revised the ratings for UCO Bank’s Upper Tier-II Bonds and Innovative Perpetual Debt Instrument from “AA” to “AA-”. The long- term ratings carry stable outlook.

The Kolkata-based public sector lender reported rise in gross non-performing assets (NPAs) to 3.49 per cent in December 2011 from 2.57 per cent a year ago. The increase in NPAs is visible in segments, such as large corporate, retail and agriculture, and adoption of system-based NPA recognition.

UCO Bank has high level of standard restructured advances (around six per cent as on December 2011). Its exposure to vulnerable sectors such as weak state electricity boards/distribution companies and aviation sector remains high, said ICRA.

The revised ratings factor in government’s 68 per cent stake, adequate profitability, comfortable capitalisation (Tier-1 of 7.79 per cent) and comfortable liquidity.

Some portion of vulnerable exposures has been restructured or is being restructured with a moratorium of two to three years in most of the cases. This will ease pressure on gross NPAs over the short to medium term. But vulnerability of those exposures continues to remain moderately high because of underlying weak financials of these entities and sectors.

The net interest margins (NIMs) of UCO Bank declined from 2.9 per cent for nine months ended December 2010 to 2.3 per cent in nine months ended December 2011.

ICRA does not expect significant decline in UCO Bank’s NIMs given management thrust on reducing the bulk deposits, to improve the CASA proportion and also pressure on NIMs to reduce from the recent reduction in cash reserve ratio.