Credit ratings agency Fitch has affirmed Union Bank of India’s Long-Term Issuer Default Rating (IDR) – a metric for the bank’s creditworthiness – at ‘BBB-‘ with a stable outlook. This keeps the bank’s outlook consistent with that of India’s sovereign rating.
The affirmation of the IDR and Government Support Rating (GSR) at ‘bbb-‘ is based on the high likelihood of government support, given the Indian government’s 75% ownership stake in the bank and its systemic importance.
Viability Rating upgraded to ‘bb-‘ from ‘b+’
The agency also upgraded Union’s Viability Rating (VR) to ‘bb-‘ from ‘b+’. VR is an indicator of the intrinsic financial strength of the bank, independent of government support. The upgrade highlights the lender’s improved risk management, greater loan diversification, and better asset quality.
“The VR upgrade to ‘bb-‘ is supported by ongoing improvements in Union’s risk profile, which are also reflected in its financial performance in recent years. The latter remains a key consideration in our assessment due to its volatile past and vulnerability due to moderate buffers,” the Fitch report stated.
Union Bank’s financial performance in 9M
Fitch notes that Union Bank has shown progress in reducing corporate loan risk and limiting exposure to unsecured retail loans. Its impaired-loan ratio decreased to 3.9% in the first nine months of FY25, and credit costs remained steady.
The bank’s capital position has also strengthened, with its Common Equity Tier 1 (CET1) ratio rising to 15.5% in 9MFY25. Despite higher internal accruals and lower loan growth, the CET1 ratio is expected to settle lower by the end of FY25 due to dividend payouts.
Union’s profitability has peaked, with the operating profit/risk-weighted asset (OP/RWA) ratio rising to 3.4% in 9MFY25, largely driven by higher non-interest income and lower risk density. However, Fitch expects limited further improvements in profitability in the near term.
The bank’s funding and liquidity position remains stable, with customer deposits making up 97% of its total non-equity funding, and a liquidity coverage ratio of 131%.
Outlook
Looking ahead, Fitch expects Union’s VR to remain stable, although potential negative rating actions could occur if there is significant deterioration in the operating environment or key financial parameters. Specifically, negative actions could be triggered by a substantial increase in the impaired-loan ratio or a significant drop in the CET1 ratio without a credible plan to restore it.
