Ratings assigns 'BB+ (sri)' Rating to Union Bank
Fitch Ratings Lanka Limited (FRL), has assigned ‘BB+ (sri)’
national rating to the Implied Long-term unsecured Senior Debt of
Union Bank of Colombo (UB).
‘BB+ (sri)’ rating indicates that there is a possibility
of credit risk developing, particularly as a result of adverse economic
change over time; however, business or financial alternatives may
be available to allow financial commitments to be met.
rating reflects the restructuring measures implemented at UB since
mid 2003, including an equity infusion by a consortium of investors
led by Sampath Bank (rated ‘A+(sri)’ by FRL), the appointment
of a new CEO and strengthening of senior management,” the
with the equity infusion, UB disposed a substantial portion of its
bad loans to a special purpose vehicle in consideration for a long-term
bond enabling the bank to report significantly better asset quality
indicators. UB’s gross NPL ratio as at December 2005 was 4%
vis-à-vis a ratio of around 38% in December 2002.
operational changes which commenced in late 2003, have displayed
encouraging progress. UB’s internal processes and controls,
particularly credit appraisal, monitoring and recoveries have been
strengthened. Going forward, FRL expects UB to contain NPL numbers
below industry averages on account of these improvements.
the above restructuring measures helped stem the deterioration,
resulting in improved depositor confidence and enabled the bank
to post modest profits, the existence of the low yielding long term
bond will continue to hamper UB’s profitability as well as
increase its vulnerability to rising interest rates.
if this bond is discounted to reflect estimated market value, UB’s
net worth position would be negative. UB’s management advises
that the bank intends to raise new capital during 2006 to address
its low capitalisation position. Capital will also have to be raised
to meet the increased minimum capital requirements imposed by the
minimum capital requirement for banks was increased to Rs 2.5 billion
by the Central Bank and will be implemented in two stages wherein
banks would be required to meet 50% of this requirement by end 2006
and the remainder by end 2007.
the first tranche of this capital raising exercise, UB’s shareholders
infused equity of Rs 175 million, an increase of 42%, last month.