Standard & Poor’s Ratings Services today assigned its ‘BBB-‘ long-term and ‘A-3’ short-term counterparty credit ratings to Union Bank of India (UBI). The outlook is stable. At the same time, Standard & Poor’s assigned its ‘C’ bank fundamental strength rating to UBI.

Standard & Poor’s also assigned the following ratings to UBI’s proposed debt issues under a US$2 billion medium-term notes (MTN) program:

— ‘BBB-‘ rating to the senior unsecured notes,
— ‘BB+’ rating to the lower Tier II subordinated notes, and
— ‘BB’ rating to the upper Tier II subordinated and hybrid Tier I notes.

The rating differential between the senior unsecured notes and the lower Tier II subordinated notes reflects the latter’s subordinated nature. The ‘BB’ rating on the upper Tier II subordinated notes and hybrid Tier I notes reflects an interest deferral option on these notes.

The ratings on UBI reflect the bank’s comfortable liquidity and funding profile, above-average profitability, and satisfactory asset quality. UBI’s capitalization, which is currently adequate, is likely to be pressured as the bank grows its loan portfolio.

“We expect extraordinary government support to be available to UBI in a distress situation due to its 55.4% government shareholding and important position in the Indian banking industry,” said Standard & Poor’s credit analyst Ritesh Maheshwari. “However, the current ratings do not incorporate this support.”

The stable outlook on the long-term counterparty credit rating reflects our expectation that UBI will continue to benefit from a majority government ownership and will maintain its stand-alone profile. The bank’s capitalization is expected to weaken but is expected to remain adequate to support its medium-term growth initiatives.

While the stand-alone credit profile might decline with significant deterioration in asset quality or profitability, a rating downgrade is unlikely due to the expected extraordinary support from the government of India, which is not yet incorporated in the rating. For the same reason, the rating will move up if the sovereign credit rating on India (BBB-/Stable/A-3) is raised.

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