Fitch affirms Union Bank of Colombo at ‘BB+(lka)’; Revises Outlook to Stable

Friday, 17 December 2010 01:35 -     - {{hitsCtrl.values.hits}}

Fitch Ratings Lanka has today affirmed Union Bank of Colombo Ltd’s (UB) National Long-term rating at ‘BB+(lka)’ and revised the Outlook to Stable from Positive.

UB’s rating reflects its moderate asset quality and lack of a broad deposit base. The rating also takes into account the challenges to the scalability of its operations and the impact to profitability given its holding of a low-yielding deep-discount bond (DDB).

The Outlook has been revised to Stable from Positive, in consideration of further time required by UB to implement the changes required in existing systems to manage challenges of scalability of operations in light of projected loan growth and branch expansion.

The implementation of necessary risk management systems and processes (including the bank’s proposed implementation of a core banking system) would enable UB to manage its expansion plans and add upward pressure on the rating. The bank’s projected loan growth as per its budget forecasts should help improve core profitability by reducing the impact on interest yields from the low yielding DDB.

UB was restructured after posting negative equity in 2002, after the bank transferred Rs. 600 m in cash and Rs. 978 m of NPLs to a special-purpose vehicle, in return for a 20-year DDB guaranteed by Sampath Bank PLC (SB, ‘AA-(lka)’/Positive); SB was involved in UB’s restructuring process and also made equity infusions.

Thereafter, the Central Bank of Sri Lanka in 2006 increased the minimum capital requirement for licensed commercial banks to Rs. 2.5 b (from Rs. 0.5 b), to be met by H110 – this has now been increased to Rs. 5 b to be met by end-2015.

Several equity infusions occurred from FY03-H110, from both existing and new shareholders, which increased UB’s equity to Rs. 3.6 b at 9M10 (end-September 2010). UB informs Fitch that a further rights issue would occur in FYE10.

In addition, all financial institutions are required to be listed by June 2011; as such UB will seek a listing in the Colombo Stock Exchange in Q111. UB plans to deploy capital for loan expansion mainly targeting its SME clientele and increasing its branch presence.

Much of the incremental NPL increase in 2009 and H110 was led by several large ticket loans that experienced cash flow delays over 2008-H110. That said, overall NPLs/gross loans declined to 9.1% in 9M10 (FYE09: 10.4%) mainly due to loan growth in the period.

The proportion of DDB to total earning assets progressively declined to 13% at 9M10 from its peak of 35% at FYE03 due to increased capital infusions over FY03-H110 and resultant loan expansion. Consequently, UB’s profitability indicators have begun to reflect improvement.

UB is a small commercial bank (0.4% of system assets) with 20 branches. SB’s stake in UB has steadily declined over the years, and accounted for 8.4% of voting shares at 9M10, having once peaked at 24% of UB’s equity at FYE03 (subsequent to UB’s restructuring). Genting Bhd of Malaysia has the largest equity stake in UB with 26.3% of voting shares at 9M10.