S&P affirms Union Bank's long, short term rating, revises SACP to 'BB-'

The bank's capital buffers have weakened due to the its merger with Andhra Bank and Corporation Bank earlier this year

Rating agency Standard and Poor’s (S&P) on Thursday revised the assessment of Union Bank of India’s stand-alone credit profile (SACP) from 'BB' to 'BB-' on weakened capital buffer.

The rating agency affirmed long-term issuer rating 'BB+' and short-term issuer rating 'B' for the Mumbai-based public sector lender.

The capital buffers have weakened due to the bank's merger with Andhra Bank and Corporation Bank earlier this year, as well as three consecutive years of accumulated losses, S&P said in a statement.

The stable outlook on rating reflects a view that Union Bank will maintain its financial profile over the next 12-18 months despite tough operating conditions, and benefit from government support.

The Covid-19 outbreak has heightened stress levels and uncertainty across the Indian banking system. This has pushed back recovery at the bank, which was already grappling with high non-performing assets (NPAs) and credit costs.

 

S&P Global Ratings forecasts India's Gross Domestic Product (GDP) will contract 7.7 per cent in the fiscal year ending March 31, 2021, and rebound by 10 per cent in fiscal 2022.

“We believe the amalgamated entity could take more than two years to benefit from the significant improvement in scale and franchise, and generate superior profitability,” the rating agency added.

UBI's tier-1 capital ratio stood at 10.1 per cent as of September 30, 2020. The risk-adjusted capital (RAC) ratio is likely to be about 4.5% over the next 12-18 months, compared with 4.2 per cent as of Sept. 30, 2020.

“Our forecast factors in equity capital infusion from the bank's capital-raising plans. The rating agency has stopped assigning equity credit to additional tier-1 instruments issued by Indian public sector banks due to uncertainty over their ability to absorb losses on a going-concern basis," it said.

"There are signs of a pick-up in economic activity in India since the lockdowns ended. Union Bank’s performance has improved in the first half ended Sept. 30, 2020, in line with the broader banking sector," the rating agency added.