S&P Global Ratings on Thursday affirmed BB-plus long-term and B short-term issuer credit ratings on Union Bank of India (UBI).
The outlook on the long-term rating is stable, it said affirming the BB-plus long-term issue rating on the bank's senior unsecured notes.
S&P said UBI's capital buffers have weakened following the bank's merger with domestic peers Andhra Bank and Corporation Bank earlier this year as well as three consecutive years of accumulated losses.
It, therefore, revised down assessment of UBI's stand-alone credit profile to BB-minus from BB.
"We believe the amalgamated entity could take more than two years to benefit from the significant improvement in scale and franchise, and generate superior profitability."
UBI's tier 1 capital ratio fell to 10.1 per cent as of September 30 compared with the pre-merger level of 10.7 per ent as of March 31.
UBI's risk-adjusted capital ratio is likely to be about 4.5 per cent over the next 12 to 18 months compared with 4.2 per cent as of September 30. The forecast factors in equity capital infusion from the bank's capital-raising plans.
"We have stopped assigning equity credit to additional tier 1 instruments issued by Indian public sector banks, including Union Bank, due to uncertainty over their ability to absorb losses on a going-concern basis," said S&P.
There are signs of a pick-up in economic activity in India since the lockdowns ended. UBI's performance has improved in the first half ended September 30 in line with the broader banking sector.
The bank's net profit was Rs 850 crore in the first half, a marked reversal from the net loss in the previous year. Its gross NPA ratio also reduced to 14.7 per cent as of September 30 from 15.8 per cent a year earlier.
"We believe much of this improvement is due to the six-month loan moratorium that ended on August 31 as well as a Supreme Court ruling barring banks from classifying any loan as a NPA."
S&P said while it sees upside to UBI's growth and earnings, headwinds to recovery remain. Economic activity in India is soft and the pandemic is not fully under control.
"Meanwhile, the sizable pile of stressed assets on the bank's books will continue to be a drag on earnings."
( With inputs from ANI )
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