Tuesday, March 4, 2014

A curious crisis: UBI saga baffles analysts


Archana Bhargava






















BS Reporter  |  Kolkata  March 4, 2014 Last Updated at 00:50 IST

Barclays says loan growth, Casa ratio and exposure to sectors under
 pressure did not indicate any stress

The crisis at Kolkata-based lender United Bank of India (UBI) appears to have 
baffled analysts, as there were no red flags that could have warned investors of
 the stress in the lender’s portfolio.

The public sector bank (PSB) is struggling with mounting losses, deteriorating 

asset quality and low capital adequacy ratio. With a massive rise in bad loans 
over the last two quarters, its capital adequacy ratio declined to 9.01 per cent
 according to Basel-III norms.

Three analysts — Anish Tawakley, Jatin Mamtani and Sumit Jain — with Barclays,

 wrote in a recent note to clients: “Identifying the red flags, of course, could 
serve as a useful screening tool for investors. Surprisingly, UBI’s credit growth 
rate, lending yield, Casa  (current account savings account) ratio and stressed
 sector exposure did not provide any adverse signals. In fact, its Casa ratio is
 among the best among public sector banks and on lending yields it is at the
 lower end of the range.”

The state-run lender had closed the previous financial year (FY13) with a Casa 

ratio of 39.7 per cent — third best among PSB’s after State Bank of India (SBI) 
and Bank of Maharashtra. The strong base of low-cost Casa deposits allowed 
the bank to offer loans at relatively lower rates than its peers. UBI’s average 
lending rates were below domestic lending rates of Punjab National Bank (PNB),
 Bank of Baroda and Bank of India.

“Thus, its lending rates would not suggest it would have suffered adverse 

selection, i.e. only being able to attract risky borrowers... Its loan growth was
 even slower than some of the large PSBs. The share of its loans to stressed 
sectors (such as infrastructure, metals and mining, textile, construction, gems 
and jewellery and agriculture) was also only slightly higher than the system/peers,”
 the analysts noted.

The only stand-out feature of UBI’s profile was that its network and credit 

exposures had a strong skew towards eastern and north-eastern states.
 “However, given the strong economic growth in these states it is not clear 
that this should be seen as a red flag. We could not identify any other 
quantifiable factors that would make UBI a special case,” the analysts said.

UBI’s loss more than doubled to Rs 1,238 crore in the October-December 

quarter. Fresh slippages topped Rs 3,000 crore, increasing the lender’s
 gross bad loans to Rs 8,546 crore at the end of the last quarter. RBI had 
recently conducted an audit to examine the factors that contributed to the
 lender’s rise in non-performing assets and capped the loan sanctioning
 power of the bank to Rs 10 crore, pending further instructions.

“Given the uncertain macroeconomic environment, most PSBs have been 

witnessing a sharp deterioration in credit quality. UBI was no exception.
 But we did not foresee the situation that the bank is currently witnessing. 
Still, a lot of clarity is awaited. On one hand, there is a sharp rise in bad loans, 
on the other, there are claims of management overstating the bank’s 
non-performing assets,” a banking analyst with a local brokerage said,
 asking not to be named.

Archana Bhargava, who became the chairperson and managing director of 

UBI in April 2013, opted to resign within 10 months of taking charge. The 
official reason cited was ill-health, even though talks of mismanagement and
growing rift with senior executives were getting louder.

“The bank needs to get more capital and step up its loan recovery efforts

 dramatically. The NPAs are way above normal level. The bank should also
ensure that the credit appraisal process is strong,” Vaibhav Agrawal, 
vice-president (research) – banking at Angel Broking, said.