Recent losses incurred by United Bank of India (UBI) could see its capital ratios fall below the regulatory minimum, and test the authorities’ approach to bank regulatory capital instruments in the present Basel III era, according to a report by Fitch Ratings.
This is likely to be the first instance within Asia since the implementation of the Basel III framework.
“It is also important at this time because a number of Indian banks — mostly State-owned — are considering raising fresh regulatory capital in the international market, in light of the capital pressures on the sector. The authorities face a dilemma, and their response could set a credit precedent,” the report said.
Existing holders of UBI’s outstanding legacy Basel II Tier-1 and Upper Tier-2 capital instruments will face the prospect of automatic coupon deferral under RBI regulations if the total capital ratio — which is currently borderline at 9 per cent — were to be breached. Moreover, compounding losses could exacerbate the risk for investors.
This is because UBI’s Tier-1 ratio was just 5.6 per cent as of December 2013, below the Common Equity Tier 1 (CET1) trigger of 6.125 per cent for Basel III Additional Tier-1 instruments and a 6.5 per cent RBI minimum requirement from March 2014.
The RBI, like many other regulators, has not clearly defined the Point of Non-Viability under Basel III. But should CET1 ratios for the banks fall further below 6.125 per cent, the risk of reaching this point clearly increases.
According to Fitch Ratings, if these challenges persist, we would expect the RBI to allow capital ratios to fall further in an effort to find a resolution before triggering the point of non-viability — which could include a fresh capital injection. The bank’s main shareholder, the State has (as part of its regular activities for State-owned banks) already injected capital amounting to Rs 700 crore this financial year.
“India has historically experienced a high level of support for problem banks — and few, if any, bondholders have experienced losses. We expect this to continue for senior creditors of systemically important institutions, but this is less clear-cut for smaller institutions such as UBI — which has a market share of just 1.2 per cent of total bank assets — and in particular for their junior instruments,” the report added.
Kolkata-based UBI’s credit profile has weakened sharply, and has been worse than at other State-owned banks. Accelerating asset-quality problems raised its gross NPA ratio to 10.8 per cent in December, up sharply from 5.6 per cent in June, last year. This has weighed on performance, with a net loss of Rs 1,680 crore in the nine months ended December 2013, against Rs 360 crore in the corresponding period a year ago.
UBI was also the first State-owned bank in India to issue Tier-2 Basel III debt capital, through a Rs 500-crore private placement with the Life Insurance Corporation in June last year. The bank is reportedly undergoing a “forensic audit” by the RBI to determine the causes of its under-performance, and there are restrictions on its ability to extend new credit.