Union Bank’s ratings reaffirmed at BBB/Stable/P3
View(s):RAM Ratings Lanka has reaffirmed the respective long- and short-term financial institution ratings of Union Bank of Colombo PLC (UB) at BBB and P3; the outlook on the long-term rating is stable.
The ratings are supported by the Bank’s healthy capitalisation but tempered by its small stature, below average asset quality, performance and funding levels, the rating agency said.
UB is one of the smallest licensed commercial banks accounting for only 0.74 per cent of industry assets as at end-September 2012. Following 87.93 per cent year-on-year (yoy) growth in credit assets in FYE 31 December 2011 amid a favourable economic climate, the group’s credit assets grew by a slower 20.72 per cent in 9months to FY Dec 2012, as lending was curtailed amid the credit ceiling placed by the Central Bank of Sri Lanka (CB).
RAM said the weakening in the bank’s loan quality, coupled with the acquisition of UB Finance (whose loan book almost entirely consisted of non-performing loans resulted in the group’s asset quality indicators weakening.
RAM said the bank’s credit asset portfolio also remained unseasoned following the aggressive credit expansion in fiscal 2011. “As such we deem the bank’s asset quality to be below average. Going forward, recovery efforts are expected to bear fruit in tandem with the gradual pick up in the construction and trading segments in the economy albeit at a slower pace,”
it said.
The bulk of UB’s customer deposits comprise relatively expensive fixed deposits. This, coupled with its low-yields had pressured the group’s net interest margin which remained weaker than its banking peers.
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