Fitch revises UCO Bank's outlook to negative

Fitch Ratings today revised the outlook on UCO Bank's national ratings to "Negative" from "Stable" due to low tier-I capital level and deterioration in profitability.

While UCO has been improving its operational efficiencies and risk management systems, its capitalisation and profitability ratios have slipped below the system median for Indian banks, the rating company said.

The Kolkata-based bank's tier-I capital ratio at 5.78 per cent and equity/assets ratio at 3.56 per cent (end-March 2007) were also lower than its peer group government banks. Therefore, UCO needed to infuse substantial equity and demonstrate a clear trend in improving its profitability, Fitch said.

The bank's profitability weakened because of two reasons: one, the rapid loan growth in recent years was funded by an increasing proportion of higher cost wholesale deposits and, two, low yields on the corporate loan portfolio, it said.

The bank has put on board a capital restructuring plan to improve valuation. It has requested the government to convert a part of its equity into non-cumulative preference shares to be followed by a public issue of equity shares.

It needed to issue more equity than planned to maintain its tier 1 ratio well above the regulatory requirement of 6% (from 2010).

This is particularly significant since the government's holding in the bank after equity expansion could dip to the statutory minimum of 51 per cent from the current 75 per cent. It will limit the bank's flexibility to raise further capital.

UCO plans to increase the proportion of low-cost deposits (saving account plus current account - CASA) from 28 per cent of total deposits at end September 2007. The level of CASA deposits of the bank is lower than that of other large government banks.

Its ability to do so could be constrained due to delayed implementation of technology and increased competition among banks for low-cost deposits, Fitch added.