The revised ratings of various tier-2 bonds programmes, aggregating to R1,075 crore, were changed from [Icra]AA+ to [Icra]AA. The agency also revised the ratings assigned earlier to the R500 crore upper tier-II bond programme and to R185 crore IPDI programme of UCO from [Icra]AA to [Icra]AA-. However, the long- term ratings carry stable outlook.
According to the agency, the revision in rating is on account of deterioration in asset quality and weak solvency profile and are supported by banks sovereign ownership, adequate profitability, comfortable capitalization and comfortable liquidity profile of the bank. The bank's asset quality deterioration is reflected in increase in gross non-performing assets (NPA) from 2.57% as on December, 2010, to 3.49% as on December, 2011. Th eincrease in NPA is due to increase in NPAs in corporate, agriculture, retail and MSME segment. The adoption of system-based NPA and relatively high exposure vis-a-vis industry to vulnerable sectors such as weak state electricity boards/distribution companies and aviation sector has also added to it. Though some portion of these vulnerable exposures have been restructured or are in the process of being restructured with a moratorium of 2-3 years in most of the cases, the vulnerability of those exposures continues to remain moderately high because of underlying weak financials of these entities/sectors, pointed out the agency.
The net interest margins (NIM) of the bank declined to 2.3% in 9 months of 2011-12. The quarter-wise movement of NIMs showed significant decline in Q4 2010-11 and thereafter has been in stable/improving trend during 2011-12 and was at around 2.6% in Q3 2011-12.
Icra does not expect significant decline in UCOs NIMs given management thrust on reducing the bulk deposits, to improve the CASA proportion and also pressure on NIMs to reduce from the recent reduction in Cash Reserve Ratio (CRR).
Although UCO banks fee-based income is low, the same is mitigated partly with relatively lower operating expenses.
The capitalisation profile of bank is supported by continuous capital support from the government for all PSBs, which enabled UCO to maintain a comfortable capitalisation profile with CRAR of 12.33% and tier-I capital of 7.79% as on December, 2011.