Union Bank of India's Capitalisation under Strain after Merger with Andhra Bank and Corporation Bank: S&P
Moneylife Digital Team 15 October 2020
The merger of Union Bank of India with Andhra Bank and Corporation Bank in April 2020 has eroded its capital buffers. Tough operating conditions will further strain the Bank's already weak capitalisation, says S&P Global Ratings.
 
In a note, it says, "We anticipate Union Bank's earnings will remain muted for the fiscal year ending 31 March 2021. The amalgamated entity could take more than two years to benefit from the significant improvement in scale and franchise, and generate superior profitability."
 
"Meanwhile, the sizable pile of stressed assets will likely drag on earnings. Union Bank's capitalisation could also become increasingly stressed as credit costs are likely to stay high, given our forecast that India's economy will shrink 9% this fiscal year. The bank's Tier 1 capital ratio fell to 9.5% as of 30 June 2020, compared with the pre-merger level of 10.7% as of 31 March 2020," the ratings agency says.
 
According to S&P, the challenging operating environment and lower capitalisation post-merger could weigh on its assessment of Union Bank's capital position and stand-alone credit profile (SACP). 
 
It says, "We may lower the bank's SACP by a notch to 'bb-' from 'bb' if we believe its risk-adjusted capital ratio would drop below 5% over the next 12-18 months. However, government support should continue to underpin the ratings. Our outlook on Union Bank is stable, and we see a very high likelihood that the bank will receive support from the Indian government if needed."
 
In S&P's views, Union Bank will be dependent on infusions from the government to ensure compliance with regulatory minimum capital requirements until earnings recover. 
 
It says, "The bank's board has approved an Rs100 billion capital-raising plan, which we believe will alleviate, but not completely offset, downside risks. We also 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." 
 
"We are awaiting comprehensive Pillar 3 disclosures of the amalgamated entity to assess its capital position under our risk-adjusted capital framework. The amalgamated entity's future capital-raising and management plans will be key to its stand-alone creditworthiness," the ratings agency concludes.
 
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