Financial Times

Fitch 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.

“The 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 statement said.

Along 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.

The 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.

While 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.

Further, 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 regulator.

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.

As the first tranche of this capital raising exercise, UB’s shareholders infused equity of Rs 175 million, an increase of 42%, last month.

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