Union Bank of India hit by Moody’s downgrade

Moody’s Investors Service downgrades the rating of Union Bank of India, one of India's largest state-owned banks.

Moody’s cited UBI’s weak asset quality and inadequate loss-absorption capacity as reasons for the downgrade from ‘D+’ to ‘D’ while global local currency deposits were cut from Baa2/Prime-2 to Baa3/Prime-3.

In the revised ratings, bank financial strength (BFSR) has been cut from ‘D+’ to ‘D’, while global local currency deposits were cut from Baa2/Prime-2 to Baa3/Prime-3.

Other ratings that were cut include foreign currency senior debt (from Baa2 to Baa3) and the foreign currency senior medium-term note programme (from Baa2 to Baa3). The foreign currency long-term/short deposit rating of Baa3/Prime-3 with a stable outlook was retained, however.

Moody’s Vice-President and Senior Credit Officer Beatrice Woo said the rating action considers UBI’s weaker financial metrics, particularly its high level of troubled assets and low provision coverage. These factors have pushed the bank into a lower standalone rating band.

The bank’s loss-absorption cushion is modest seeing its declining asset quality and expected growth. Its Tier-I capital ratio stood at 7.98 per cent at the end of December, slightly below the 8% mark the government has mandated for public sector banks. It is also lower than that of its peers.

 “When balancing these factors and its overall franchise value, the revised rating ranks UBI more appropriately, compared with other Moody’s-rated Indian mid-sized public-sector banks,” Woo said.

UBI, which is based in Mumbai, reported revenues of US$3.7 billion in 2011 and a net income of US$415 million.

Its non-performing assets (NPAs) in 2011, however, stood at 3.33% while restructured assets accounted for 5.53% of the bank’s loans.