Moody’s today affirmed the local and foreign currency deposit ratings of state-run lenders, Union Bank of India and Central Bank of India.
The global agency has also kept the rating outlook for Union Bank at positive and changed the same for Central Bank to stable from negative.
While the ratings on Union Bank has been retained at Baa3/P-3, Central Bank is affirmed at Ba1/NP, it said in a statement issued from Singapore.
However, it has lowered the baseline credit assessment of Union Bank to Ba3 from Ba2 and retained the same of Central Bank at B3.
On the ratings rationale for Union Bank, it said the action reflects the continued deterioration in its asset quality. It can be noted that bank’s impaired loans ratio deteriorated to 11.6 per cent in the September quarter from 9 per cent in the same period of 2014.
Though the pace of new impaired loan formation has moderated, its asset quality continues to face downside risks, particularly from exposure to stressed corporate, it noted.
On the positive side, Moody’s said: “It expects the bank will benefit from recent the government policy initiatives to reduce stress in the banking sector. In particular, the UDAY scheme will alleviate some of the pressure on its exposure to power distribution companies.”
With the continued pressure on asset quality, credit costs are expected to remain high and will adversely impact internal capital generation, Moody’ said.
However, the rating outfit expects Union Bank’s capital level to benefit from regular capital infusions by the Government, which in September, pumped Rs 1,080 crore into it.
The government holds 63.4 per cent in the bank, and the agency expects the lender to “continue to enjoy a very high level of government support.”
On the Central Bank’s rating, Moody’s said it reflects the bank’s poor asset quality, weak earnings and inadequate buffers for potential loan losses. Its NPAs stood a historic high 20.5 per cent in September 2015 quarter, the highest in the industry. Its high NPAs are backed by relatively weak buffers — provisioning coverage of 46 per cent and tier 1 ratio of 7.7 per cent at the end of the September quarter.
Nevertheless, asset quality of the bank, in which the government owns 81.46 per cent, has started to stabilise and the pace of impaired loan formation has slowed considerably.
In addition, a large portion of the bank’s standard restructured loans is exposed to power distribution companies which we expect will benefit from the UDAY scheme, it said.