CARE reaffirms rating assigned to Tier II Bond issue of UBI

CARE has retained the ‘CARE AA+’ [Double A Plus] rating assigned to the outstanding Tier II bonds of Rs.800 crore of Union Bank of India (UBI). Instruments with this rating are considered to offer high safety for timely servicing of debt obligations. Such instruments carry very low credit risk.

The rating factors in UBI’s comfortable capital adequacy, majority ownership by Government of India (GoI), long standing track record and steady profitability indicators. The rating is however, constrained by UBI’s moderate asset quality, low proportion of fee based income . UBI’s ability to maintain its spreads in the wake of increasing competition and contain fresh slippages while maintaining the credit quality would be the key rating sensitivities.

UBI is one of the largest public sector banks in terms of asset size with Government of India holding 55.43% of equity and a nationwide network of 2206 branches and 769 ATMs as on March 31, 2007. Total asset size of UBI has grown by 15% to Rs.102221 crore as on March 31, 2007.

The credit growth of UBI in FY07 was moderate at 17% as compared to the overall credit growth of the banking industry which was around 28%.  In order to increase the yield on advances and improve the margins, UBI changed its focus from corporate advances to agri business, SME and retail sectors. As a result, the yield on advances increased from 8.04% in FY06 to 8.76% in FY07. UBI’s retail and SME advances as on March 31, 2007 were Rs.13529 crore and Rs.8833 crore respectively out of total advances of Rs. 62386 crore on March 31, 2007.

UBI’s growth in deposits too was moderate at 15% during FY07. Low cost deposits form 34.50% of total deposits of Rs. 85180 crore  on March 31, 2007. UBI’s cost of deposits has gone up from 4.64% in FY06 to 5.07% in FY07 in the overall rising interest rates scenario.

UBI recorded a 25% growth in PAT during FY07 as compared to FY06 and PAT for FY 07 was Rs. 845 crore .UBI has a very low proportion (9%) of non interest income in total income. ROTA has marginally improved from 0.84% for FY06 to 0.89% on account of high growth in profit vis-ŕ-vis moderate growth in assets. NIM  of UBI was around 2.92% during FY07 and Credit Deposit ratio was 73% as on March 31, 2007 which is similar to that as on March 31, 2006.

Asset quality of UBI is moderate, which has shown improvement in recent years in line with the overall banking industry. Due to strong recovery in FY07 and less slippages in FY07 the gross NPA ratio has improved from 3.84% as on March 31, 2006 to 2.94% as on March 31, 2007. UBI’s net NPA to net worth ratio has improved from 20.38% as on March 31, 2006 to 12.70% as on March 31, 2007. UBI’s capital adequacy position is comfortable with Capital Adequacy Ratio (CAR) as on March 31, 2007 being 12.80%.

During the first quarter of FY08, UBI recorded PAT of Rs.225 crore and the asset size stood at Rs.104148 crore with CAR at 12.66% as on June 30, 2007. The gross NPA ratio stood at 2.78% and net NPA ratio at 0.78% respectively as on June 30, 2007.  

Sourced From: Careratings