Brickwork ratings assigns "BWR AAA" for Union Bank of India's

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Bangalore, Feb 24 (ANI/Business Wire India): Brickwork Ratings has assigned BWR AAA (Pronounced BWR triple A) for Union Bank of India's proposed Lower Tier II Capital Bonds issue of INR 600 crore, or INR 6.00 billion.

The rating reflects the Government of India's ownership stake, higher operating profits, favorable operating spread and returns, healthy earning assets, optimum operating cost structure, well diversified loan portfolio, comfortable CASA level, and lower delinquency ratio.

Union Bank of India is the sixth largest public sector bank with a reported asset base of INR 1,240.73 billion and off-balance sheet exposure of INR 625.17 billion as on 31st March 2008. The bank had initiated many steps under Nav Nirman project to accelerate business growth in tandem with the fast changing business environment during FY 07. As a result, the bank's total business had increased by 20.76% during FY 08 to reach INR 1,797.37 billion from INR 1488.38 billion for the same period, in 2007.

The bank has steadily grown its asset base over the years, aided by robust growth in deposits. The bank's total deposits stood at INR 1,038.58 billion, a growth of 21.93% as on 31st March 2008, compared to INR 851.80 billion, a year ago. In line with public sector banks in India, the bank is also largely funded through term deposits.

The term deposits of the bank account for 65.14% of total deposits. During FY 08, both current deposit and savings bank deposit has recorded a significant growth of 37.26% and 17.36% respectively. However, the bank's composition of low-cost deposits to total deposits stood at 34.86%, which is slightly lower than peers' average of 35.65%. Going forward, the bank will continue to focus on retail deposits growth by leveraging its CBS platform to launch CASA and term deposits products to generate more low cost deposits.

The bank has a well diversified loan portfolio with focus on high yielding segments of agriculture credit, MSME credit and retail credit. The bank's gross credit increased by 19.20% to reach INR 758.78 billion from the previous level of INR 636.58 billion. While advances have grown robustly, the bank's term lending component at 43.64% is still lower than the industry average.

Further, the bank's priority sector advances grew by 12.57% to INR 300.29 billion as on 31st March 2008. The bank's quest to maintain its asset quality is visibly seen in the unsecured lending trends. During FY 08 the bank's unsecured loan portfolio declined by 14.07%. The bank has been very stable with its loan portfolio; however the exposure to sensitive sectors like commercial real estate and capital market is a cause for concern. During FY 08, the bank's commercial real estate lending and the capital market exposure has increased by 47.4% and 47% respectively.

During FY 08, the bank posted impressive top line and bottom line figures. Union Bank of India is one of the most profitable public sector banks in India, with total income of INR 105.34 billion during FY 08, reflecting the significant resilience in core banking operations, excellent fee based income and focus on healthy earning assets which contributed to improvement in the profitability.

The operating profit of the bank increased from INR 20.01 billion to INR 25.80 billion, registering an increase of 28.94%. The bank's net profit also increased from INR 8.45 billion to INR 13.87 billion during FY 08, with an impressive growth of 64.14%. The bank's profitability is largely driven by buoyancy in the core banking operations, lean operating structure, healthy earning assets and growth in non-interest income.

The bank's capital adequacy ratio is adequate though slightly lower than its peers' average. The bank has reported total capital adequacy ratio of 12.51% under Basel I as on 31st March 2008 compared to 12.80% for the same period a year ago. The bank's tier-I capital ratio stood at a moderate 7.54% as on 31st March 2008, which is slightly lower than its peers' average of 7.95%.

During FY 09, the bank has started building up Tier I capital by issuing INR 2 billion perpetual bonds to augment capital funds. As a result, the bank's capital adequacy ratio marginally improved to 12.53% in Q2 FY 09. Brickwork expects that Union Bank of India will continue to enjoy systemic support from the Government of India, in the event of any distress. Brickwork calculates Leverage that assess bank's capital adequacy with reference to both on balance and off balance sheet exposures. Union Bank of India has shown a higher leverage of 22.17 compared to its peer group at 19.46.

The bank's asset quality has been improving as evident by the declining NPA ratio. The bank's asset quality trends remain stable, sound and consistent compared to its peer group. The bank however used various options like strict credit monitoring, centralized credit processing centers, up-gradation of slipped accounts, disposal of impaired assets, and cash recoveries under regulation to manage NPA portfolio. Further, the bank has opened five new asset recovery branches to focus on big NPA accounts. During FY 08, the bank had witnessed a significant improvement in asset quality that helped to reduce gross NPAs to 2.18% from 2.94% in the previous year.

Meanwhile net NPAs also declined sharply from 0.96% to 0.17%. With strong recoveries (INR 6.41 billion) from written off accounts and lower slippages (1.6%), the bank was able to improve its asset quality during FY 08. The bank has further reduced its gross NPA (1.93%) and net NPAs (0.14%) during 2Q FY09. The bank has accomplished excellent credit growth with declining NPAs by adhering to its well defined loan policy and disciplined credit culture.

The ratings by-and-large factored Government of India's ownership stake, healthy earning assets quality, high provisioning, good risk management system, sensible risk asset coverage and adequate risk adjusted capital.

Brickwork expects that the continuing financial crises and high returns on term deposits should have an adverse impact on the bank's low cost CASA deposits in the near term. However, the bank's healthy earning assets, robust growth in core income, decline in gross NPAs, adequate risk weighted capital, strong recovery record, and centralized lending process to contain fresh slippages are strong factors which would help the bank to tide over the crises. The detailed rationale is enclosed as Annexure A. (ANI)

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