Union Bank of India's proposed bonds of up to Rs.2,000 crore rated AA+

Union Bank of India's proposed bonds of up to 2,000 crore Rs. rated AA plus.

04 Mar , 2021 By : kanchan Joshi

MUMBAI: Public sector lender Union Bank of India’s proposed Basel III-compliant tier II bonds of up to 2,000 crore Rs. has been rated AA (hyb) with a negative outlook by rating agency Icra Ltd.

According to the rating agency, the negative outlook factors in the expected weakening of capital cushion and solvency position below the negative rating triggers, in case asset quality stress increases and the bank is not able to raise incremental equity capital.

The letters hyb, in parenthesis, stand for hybrid, indicating that the rated instrument is a hybrid subordinated instrument with equity-like loss-absorption features.

Icra said the rating action takes into account Union Bank of India’s sovereign ownership and the demonstrated track record of capital support received by the bank. It expects the bank to continue receiving support, given its increased importance in the Indian banking system.

“The above positives are, however, offset by the merged entity’s weak capital position and asset quality position. While the asset quality stress because of the covid-19 pandemic is lower than initially estimated, it remains elevated as reflected by the high level of proforma1 slippages and non-performing assets (NPAs)," it said.

The government is the bank’s largest shareholder, accounting for an 89.07% equity stake as of 31 December. The merged entity, including Union Bank of India and the amalgamated banks (erstwhile Andhra Bank and erstwhile Corporation Bank), received sizeable equity capital support from the government amounting to Rs32,796 crore during FY18-FY20, of which 11,768 crore was infused in FY20.

Besides, high credit costs and its impact on profitability remain a concern. Icra pointed out that the bank management has guided for a credit provisioning of 2.5-3% of advances in FY21, which is likely to consume the majority of the operating profits for the year.

Even after significant credit provisions in FY21, the net NPAs are expected to remain near 5% by 31 March 2021, which shall result in elevated credit provisions even during next year and hence weaker profitability," it added.