Feb 28, 2011 (LBO) - RAM Ratings Lanka has assigned a long-term BBB rating to Union Bank with a stable outlook and a short-term rating of P3, a statement said.
"The ratings are premised on the bank’s healthy capitalisation as well as adequate funding and liquidity positions," the rating agency said.
"On the other hand, they are constrained by the bank’s small size, limited geographical reach and its relatively concentrated loan book."
Union Bank, set up to focus on second-tier corporates and small and medium enterprises, is presently the smallest domestic licensed commercial bank.
As at end-September 2010, the bank’s asset base stood at 17.91 billion rupees, accounting for 0.75 percent of the total banking industry’s assets.
Union Bank has limited geographical reach, with 21 branches as at end-December 2010, but with plans to operate over 55 branches by 2013, using the new capital infusion, RAM Ratings said.
An initial public offer for 375 million rupees of stock in Union Bank drew record subscriptions of 84 billion rupees or 225 times last week, making it the largest oversubscription ever in the island.
RAM Ratings said loan expansion and the lower overall cost of funding had helped dilute a deep discounted bond (DDB) yielding a relatively low return of four percent the bank had got during a restructuring in 2003.
The revamp allowed it to transfer 600 million rupees of cash and 978 million of bad debts to a special-purpose vehicle.
As a result, the bank’s net interest margin (NIM) widened from 3.48 percent in 2009 to 4.73 percent in 2010.
"Excluding the impact of the DDB, the bank’s margins would have been in line with its peers’," RAM Ratings said.
As at end-December 2010, Union Bank’s return on assets clocked in at 1.90 percent, against 1.01 percent the year before, and lower than those of its peers.
"The bank’s margins are envisaged to improve as its loan books expand and further dilute the DDB’s effects, coupled with prospectively lower funding costs due to new capital infusion," the rating agency said.
"However, its overall profitability will be constrained by increased overheads arising from its branch expansion, as well as the gestation period needed for the new branches to break even."
Union Bank’s gross non-performing-loan (NPL) ratio is higher than its peers’ owing to slower loan growth due to lower demand for credit and delinquencies of a few large loans amid the weak macro economic climate in 2008 and 2009.
Union Bank’s gross NPLs had increased from 366.42 million rupees as at the end-December 31, 2008 to 866.70 million as at end-September 2010 causing the gross NPL ratio to rise from 4.91 percent to 9.30 percent.
"The jump in the gross NPL ratio was precipitated by the bank’s concentrated loan book as top 20 loans took up 38.85 percent of the loan base as at end-September 2010,' the statement said.
This was reflected in the NPLs with the top 20 NPLs accounting for 76.53 percent of gross NPLs.
"Union Bank’s efforts to rein in NPLs are bearing fruit," the rating agency said.
NPLs receded to 794.28 million rupees as at end-December 2010 enabling Union Bank’s gross NPL ratio to improve to 8.24 percent.
"The improvement in the bank’s gross NPL ratio had been driven by more recoveries, lower incidences of new NPLs as the economy improved, and the expansion of its loan books," RAM Ratings said.
"We expect the same factors to underscore further improvement in its asset quality."
RAM Ratings said 385 million rupees of NPLs had been restructured by end-December 2010, and should be returning to the “performing” category over the next 3–6 months.
If the rescheduling exercise is successful, the bank’s gross NPL ratio is expected to decrease to five percent.
"Union Bank’s funding and liquidity positions are deemed to be adequate," the statement said.
The bank’s funding base is dominated by deposits (73.00 percent as at end-December 2010).
Union Bank’s statutory liquid asset ratio clocked in at 36.31 percent as at end-December 2010, well above the regulatory minimum of 20 percent.
"On the other hand, its deposit base tilted towards more expensive time deposits and certificates of deposit," the statement said.
"This is reflected by the bank’s ratio of interest expenses over interest-bearing liabilities, which is higher than its peers’.
"However, we note that the bank’s dependence on these higher cost funding has been receding as time and certificate of deposits took up 67.51 percent of the deposit base as at end-September 2010.
This was lower than 76.07 percent recorded as at end-December 2009.
At the same time, Union Bank’s deposit base was relatively concentrated as top 20 depositors made up 28.67 percent of its total deposits.
Union Bank’s capital adequacy is deemed healthy by the rating agency.
Its tier-1 risk-weighted capital-adequacy ratio (RWCAR) and overall RWCAR clocked in at 28.59 percent and 28.97 percent as at end-September 2010 after a 1.94 billion rupee private placement exercise in June 2010.
This has also strengthened the bank’s buffer against adverse movements in its asset quality, as measured by its ratio on net NPLs to shareholders’ funds, which stood at 13.37 percent as at end-December 2010.
source - www.lbo.lk
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