UBI's losses may test India's approach to Basel III, warns Fitch

Fitch Ratings today warned that recent losses incurred by United Bank of India (UBI) may 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 instance within Asia since the 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 fresh regulatory capital in the international market, in light of the capital pressures on the sector," the rating agency said in a statement.

Kolkata-based UBI's credit profile has weakened sharply and is considered worst among its peers. The bank's gross non-performing asset ratio increased to 10.8% at the end of December, 2013 compared to 5.6% in April-June quarter. It impacted the bank's earnings as it incurred a net loss of Rs 1,680 crore in the nine months ended December, 2013 compared to a profit of Rs 360 crore in the corresponding period of previous year.

 

UBI was the first state-run bank in India to issue tier 2 Basel III debt capital, through a Rs 500 crore private placement with the Life Insurance Corporation of India (LIC) in June last year. 

"The authorities face a dilemma, and their response could set a credit precedent. Existing holders of UBI's outstanding legacy Basel II tier 1 and upper tier 2 capital instruments will face the prospect of automatic coupon deferral as per Reserve Bank of India (RBI) regulations if the total capital ratio – which is currently borderline at 9% – were to be breached," Fitch said.

 

It further warned that compounding losses could aggravate the risk for investors. "This is because UBI's tier I ratio was just 5.6% as of December, 2013, below the common equity tier 1 trigger of 6.125% for Basel III additional tier 1 instruments and a 6.5% RBI minimum requirement from March, 2014," the rating agency added.

 

UBI is reportedly undergoing a 'forensic audit' by RBI to determine the causes of its underperformance, and there are restrictions on its ability to extend new credit.