India Ratings assigns Union Bank of India's Tier II Bonds 'IND AA+'/Stable, affirms existing ratings

India Ratings and Research (Ind-Ra) has affirmed Union Bank of India's (Union) Long-Term Issuer Rating at 'IND AA+' with a Stable Outlook.

Ind-Ra has revised the Outlook on the banking sector as well as public sector banks (PSBs) to stable for FY22 from negative, on the back of lower-thanexpected stress on banks' books on account of COVID-19 and high legacy provisions and capital buffers that banks have built-in. Accounting changes at PSBs have increased their ability to raise tier 1. Also, the government of India (GoI) has earmarked INR345 billion for capital infusions in PSBs over 4QFY21-FY22.

The ratings factor in an increase in Union's systemic importance post its amalgamation with Corporation Bank and Andhra Bank, and continued support from the GoI, given its majority shareholding of 89.1% at end-June 2020. Post the amalgamation, the bank's total deposit and net advances market share increased to around 6.7% and 6.1%, respectively, at FYE20, thereby making it the fifth-largest PSB. Ind-Ra expects the bank to continue to build covid-provisions to take care of 5% of its stressed book (post covid; incremental proforma GNPAs, restructuring and SMA 2 accounts), of which half could be restructured. While IndRa expects the bank's asset quality and capital buffers to be under pressure for FY21 and FY22, owing to covid-related and legacy provisioning, the same would be manageable. If the economy picks up and the restructured assets do not see substantial deterioration, the bank could be better placed to gain market share. In the near term, the bank plans to raise capital (equity and sub-debt); some PSBs have managed to raise such capital from the markets during December 2020- January 2021.

For AT1 instruments, the agency considers the discretionary component, coupon omission risk and the write-down/conversion risk as key parameters to arrive at the rating. The agency recognises the unique going-concern loss absorption features that these bonds carry and differentiates them from the bank's senior debt, factoring in a higher probability of an ultimate loss for investors in these bonds. Post the setting-off of P&L balances with share premium account, Union's distributable reserves were 5.7% of risk weighted assets at end-December 2020.

Shares of UNION BANK OF INDIA was last trading in BSE at Rs.40.05 as compared to the previous close of Rs. 40.6. The total number of shares traded during the day was 591000 in over 1508 trades.

The stock hit an intraday high of Rs. 41.45 and intraday low of 39.9. The net turnover during the day was Rs. 23974200.

Source : Equity Bulls

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