(Repeat for additional subscribers)
Feb 11 (The following statement was released by the rating agency)
Recent losses incurred by United Bank of
India (UBI) could see its capital ratios fall below the regulatory minimum, and
test the authorities' approach to bank regulatory capital instruments in the
present Basel III era, says Fitch Ratings. This is likely to be the first
instance within Asia since the implementation of the Basel III framework. It is
also important at this time because a number of Indian banks - mostly
state-owned - are considering raising fresh regulatory capital in the
international market, in light of the capital pressures on the sector.
The authorities face a dilemma, and their response could set a credit precedent.
Existing holders of UBI's outstanding legacy Basel II Tier 1 and Upper Tier 2
capital instruments will face the prospect of automatic coupon deferral as per
Reserve Bank of India (RBI) regulations if the total capital ratio - which is
currently borderline at 9% - were to be breached.
Moreover, compounding losses could exacerbate the risk for investors. This is
because UBI's Tier 1 ratio was just 5.6% as of December 2013, below the Common
Equity Tier 1 (CET1) trigger of 6.125% for Basel III Additional Tier 1
instruments and a 6.5% RBI minimum requirement from March 2014.
The RBI, like many other regulators, has not clearly defined the Point of
Non-Viability (PONV) under Basel III. But should CET1 ratios for the banks fall
further below 6.125%, the risk of reaching this point clearly increases. If
these challenges persist, we would expect the RBI to allow capital ratios too
fall further in an effort to find a resolution before triggering the PONV -
which could include a fresh capital injection. The bank's main shareholder, the
state, has (as part of its regular activities for state-owned banks) already
injected capital amounting to INR7bn this financial year.
A deferral of coupon payments on legacy Tier 1 and Upper Tier 2 instruments
would be consistent with the overall approach agreed at the G20 level (of which
India is a member): of ensuring that regulatory capital instruments behave more
like equity at times when banks face difficulties, and thereby help in restoring
an institution back to health. However, India has historically experienced a
high level of support for problem banks - and few, if any, bondholders have
experienced losses. We expect this to continue for senior creditors of
systemically important institutions, but this is less clear-cut for smaller
institutions such as UBI - which has a market share of just 1.2% of total bank
assets - and in particular for their junior instruments.
Kolkata-based UBI's credit profile has weakened sharply, and has been worse than
at other state-owned banks. Accelerating asset-quality problems raised its gross
NPA ratio to 10.8% in December, up sharply from 5.6% in June, last year. This
has weighed on performance, with a net loss of INR16.8bn in the nine months
ended December 2013, against a INR3.6bn profit in the corresponding period the
UBI was also the first state-owned bank in India to issue Tier 2 Basel III debt
capital, through a INR5bn private placement with the Life Insurance Corporation
in June last year. The bank is reportedly undergoing a "forensic audit" by the
RBI to determine the causes of its underperformance, and there are restrictions
on its ability to extend new credit.