Rating action
ICRA Lanka Limited has reaffirmed the Issuer Rating of Union Bank of Colombo PLC (“UBC”/ “the Bank”) at [SL]BBB (pronounced as S L Triple B) with Stable outlook.
Rationale
The rating reaffirmation takes into account the strategic and financial support received from Texas Pacific Group (TPG) through its affiliate, Cultural Financial Holdings Ltd (CFHL) which held a 70.84% stake as of March 2021. TPG has 3 representatives in the 9-member Board of Directors of the Bank and provides strategic support to the senior management team.
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Furthermore, ICRA Lanka also considers favourably the Bank’s comfortable capital position, backed by TPG.
The Bank continued to maintain comfortable Capital Adequacy Ratios with core capital and total capital adequacy ratio of 15.61% and 15.88%, respectively as in March 2021 (regulatory requirement of 8.00% and 12.00%, respectively). While the rating takes note of the minimum regulatory core capital requirement of LKR 20 Bn to be met by end of CY2022, ICRA Lanka takes comfort from the warrants issued[1] to CFHL, maturing in Sep 2022 and which could be exercised to meet the regulatory requirement and expects TPG to provide timely and adequate capital to UBC, if required.
However, ICRA Lanka takes cognisance of the Bank’s weak subsidiary; UB Finance Company Limited (Rated [SL] BB/Negative), which operates below the minimum regulatory capital requirement. The rating also takes comfort from the Bank’s liquidity profile with improvements witnessed over the past 1.5 years mainly on account of the increased investments in GSECs. Also, the Bank reported improvement in the short-term (less than 12 months) bucket with positive cumulative mismatch of 24.24% as on Mar-21, from 14.48% as on Mar-20.
ICRA Lanka takes note of the Bank’s stretched asset quality indicators with gross NPA ratio of 6.05% in Dec-20 which was further aggravated amidst the moderation of the loan portfolio during CY2020. Additionally, the Bank had a 34% concentration in the SME segment as on March 2021, which has been the most vulnerable segment, in terms of asset quality; the SME segment accounted for 77% of the gross non-performing loans as on March 2021.
The Bank has reported improved Current Account and Savings Account (CASA) ratio (30.46% as on March 2021), however, the limited franchise constraints it to be below the Licensed Commercial Bank (LCB) sector average (36.88% as on March 2021). Finally, ICRA Lanka has noted the improved profitability indicators of the Bank with Return on Assets (RoA) at 0.91% in Q1CY2021 vis-à-vis 0.57% in Q1CY2020, however, factors the lower profitability in comparison to industry averages. Going forward, improvement in asset quality and earnings would be crucial from a rating perspective.
Outlook: Stable
ICRA Lanka believes that UBC will continue to benefit from the support of TPG. The outlook may be revised to ‘Positive’ in case of a steady improvement in the resource, earnings and liquidity profiles as portfolio expands, while keeping the asset quality under control. The outlook may be revised to ‘Negative’ in case of a significant weakening of the asset quality, profitability, liquidity or capital profile.