CRISIL Ratings has revised its outlook on the long-term debt instruments of Union Bank of India (UBI) to ‘Stable’ from ‘Negative’. The credit rating agency also reaffirmed its ratings on these instruments at either ‘AA+’ or ‘AA-’.

The revision in the outlook to ‘Stable’ factors in better-than-expected performance of the bank amid the current challenging macro environment, the agency said in a note.

CRISIL Ratings had assigned ‘Negative’ outlook on the long-term debt instruments on September 1, 2020 to reflect the potential stress that the bank's asset quality and, consequently, profitability could witness on account of the challenging macro environment.

Profitability of the bank has witnessed an improvement with the bank reporting profit after tax (PAT) of ₹1,576 crore in the nine months ended fiscal 2021, against substantial loss of ₹6,614 crore in fiscal 2020, CRISIL Ratings said in a statement.

At the same time, provision coverage ratio (PCR) has also increased to 71 per cent as on December 31, 2020 (coverage on pro-forma gross non-performing assets/NPAs, excluding the Supreme Court dispensation on asset classification) from 68 per cent as on March 31, 2020.

The agency observed that the bank’s capital position has also strengthened, supported by raising ₹ 1,700 crore of Tier 1 bonds and ₹ 2,000 crore of Tier 2 bonds in fiscal 2021, so far.

As a result, the bank’s common equity tier (CET)-1 ratio, Tier-I capital adequacy ratio (CAR) and overall CAR improved to 9.2 per cent, 10.5 per cent and 13.0 per cent, respectively, as on December 31, 2020, from 8.6 per cent, 9.8 per cent and 12.1 per cent as on March 31, 2020.

CRISIL Rating underscored that overall, the asset quality has been supported by various schemes launched by the Government of India and the Reserve Bank of India (RBI).

“Nevertheless, Union Bank’s pro-forma gross NPAs remained high at 15.28 per cent as on December 31, 2020 (14.6 per cent as on March 31, 2020). Reported gross NPAs on the same date, was 13.5 per cent,” the statement said.

The agency said the one-time restructuring scheme is expected to benefit reported NPA metrics. The bank plans to restructure around 3 per cent of its advances.

CRISIL Ratings said the ratings continue to factor in expectation of strong support from its majority owner, the Government of India and its sizeable scale of operations. It also factors in the modest asset quality and earnings profile of the bank.

While economic activity has started picking up, any sudden surge in Covid-19 cases leading to partial lockdowns could negatively impact the collections, cautioned the agency. Hence, the bank’s asset quality and its consequent impact on earnings profile will continue to be closely monitored.

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