Fitch’s ‘Positive’ outlook for Union Bank

Fitch Ratings said it has affirmed the National Long-term rating of Union Bank of Colombo Ltd (UBC) at 'BB+(lka)' reflecting the bank's improved asset quality on a restructured loan book, constrained profitability and lack of a broad deposit base. “The Outlook is revised to Positive from Stable,” Fitch said.

Equity infusion in FY07, from existing as well as new shareholders, enhanced equity to Rs 1.434 billion at end-October 2007 (Rs 746.9 million at FYE06). Given UBC's low profitability and resulting constraints in generating internal capital, Fitch said that achieving the Rs 2.5 billion minimum capital requirement (MCR) by end-2009 is likely to require a further equity infusion of around Rs 1.0 billion.

“Aided by cautious lending practices and a relatively unseasoned loan book, gross NPL/gross loans ratio improved to 3.5% at Q307, from 5.0% at FYE06, and was well below the sector average,” Fitch said.

Subsequent to posting negative equity in 2002, UBC underwent a restructuring exercise which resulted in the bank holding onto a 20-year deep discounted bond (DDB) with a face value of Rs 3.458 billion and an implicit rate of return of 4%. The DDB accounted for 18.7% of assets at Q307.