Fitch upgrades Union Bank’s National Long-Term Ratings

Fitch Ratings Lanka has upgraded the National Long-Term Ratings of Union Bank to ‘BBB-(lka)’ from ‘BB+(lka)’ with a Stable Outlook.

The upgrade of Union Bank’s rating reflects its better risk profile through a more diversified loan book, increased profitability and higher-than-average capitalisation amongst other rating drivers. 

The ratings reflect the Bank’s successful shift towards a diversified loan composition with Corporate, SME and Retail loans accounting for 48%, 33% and 19% of total loans respectively, as at end of 2018. The latest rating by Fitch has taken into account the Bank’s gross Non-Performing Loan (NPL) ratio of 3.7% as at year end 2018 and the loan growth which it believes has the potential to accelerate further in the medium term. 

The upgrade is also an affirmation of Union Bank’s growing commercial banking franchise and continuously improving profitability. The Bank’s profit before all taxes as at year end 2018, exceeded Rs. 1 billion to record a growth of 49%, aided by continued growth in core banking income. 

Net Interest Income of the Bank reached Rs. 3,652 million in 2018. Which was a significant increase of 19.9%. As a result of focused efforts to improve fees and commission income; the fee and commission income of the Bank which mainly comprise of deposit related fees, trade and remittances, loans, cards and other fees recorded an impressive growth of 23.6% YoY. 

Fitch Ratings Colombo stated that Union Bank’s profitability metrics have increased in 2018 with operating profit/risk weighted assets rising to 1.5% in 2018 (2017: 1.1%), aided by better net interest margins which helped offset high impairment costs. “We expect the improving trend to continue in 2019, albeit slightly, in light of the still challenging operating environment” it said in the statement. 

Carrying forward the positive growth momentum of 2018, Union Bank recorded healthy first quarter results in 2019. The Bank posted significant growth in its core banking operations, reflecting a 62% YoY growth in profits from operating activities. The Bank went on to record an impressive YOY growth of 49% in profit before all taxes for the period ended March 2019, highlighting its continued performance and progress while continual focus on revenue optimisation through portfolio re-alignment within and across business units resulted in a 19% YoY growth in NII which was Rs. 1,013 million during the period ended 31 March 2019. Fee and commission income grew by 19% YoY during the first quarter of 2019.

Union Bank is well-positioned for growth as one of the highest capitalised private commercial banks in Sri Lanka with the strength of TPG; the US based global private investment firm with over $ 70 billion in capital under management and an extensive global network with significant presence in Asia and Europe. Following TPG’s investment Union Bank embarked on a transformational journey of growth and expansion as a fully-fledged commercial bank serving Corporate, SME and Retail Banking segments. With a solid foundation etched with financial stability and a renewed business focus enriched with international know-how, Union Bank is now amongst the fastest growing commercial banks in Sri Lanka.

Fitch Ratings in its report recognised the Bank’s capital position stating, “Union Bank’s capital position in terms of Fitch Core Capital ratio of 15.4% at end-2018 remains stronger than similarly rated peers. We believe Union Bank would be able to sustain comfortable capital buffers and meet the regulatory minimum capital requirement with access to capital from major shareholder through the exercise of warrants if required.”