Rating agency ICRA on Tuesday downgraded UCO Bank’s two Tier II bond programmes of Rs1,300 crore (Rs800 crore and Rs500 crore) to A+ and A-, respectively, citing the bank’s weak operating and financial performance. “The ratings downgrade take into account UCO’s weak operating and financial performance during Q4FY2017 and in FY2017 overall,” it said in a statement, adding that the outlook on the long-term ratings of the bank is ‘negative’. The agency said that driven by consecutive years of losses during last two fiscals, and high levels of non-performing assets (NPAs), the capitalisation levels and solvency profile remain weak for the bank. The downgrade also takes into account the unfavourable outlook on the bank’s profitability amid high NPAs and the consequent challenges which the bank is likely to face to meet the increasing capital requirements under Basel III regulations. The bank’s asset quality remains weak with gross and net NPAs of 17.13% and 8.94%, respectively, as on March 31, 2017, compared with 15.44% and 9.09%, respectively, as on March 31, 2016. “With the standstill clause being applicable on asset classification under various schemes on resolution of stressed assets, UCO has a large number of loans continuing to be classified as standard accounts. Hence the reported asset quality is likely to deteriorate further going forward,” it said.
ICRA said that despite an equity raising of Rs2,183 crore (including Rs1,925 crore from the Government of India (GoI)) and raising of additional Tier 1 (AT 1) bonds of Rs750 crore during FY17, the bank’s capital ratios remain weak with limited cushion to absorb future losses. While the Tier 1 capital improved to 8.27% as on March 31, 2017 from 7.75% as on March 31, 2016, it is only marginally higher than the regulatory minimum of 8.25% (including capital conservation buffer of 1.25%) as of March 31, 2017 mainly on account of the sustained losses.
In May 2017, the Reserve Bank of India (RBI) included UCO under the prompt corrective action (PCA) framework given the bank’s high net NPAs and negative return on assets. “Inclusion under PCA would entail that the bank raises more capital and create higher provisions for NPAs. With 5-10% growth in risk weighted assets (RWA) and a 50 bps cushion on the minimum regulatory capital requirements, ICRA expects the bank to require a total Tier 1 capital of Rs3,000-4,300 crore during FY2018 and FY2019, of which Rs1,800-3,000 crore has to be equity capital to meet CET-I requirements and balance AT-1 bonds,” it added.