Union Bank likely to divest or infuse fresh capital to finance subsidiary

Union Bank of Colombo PLC (UBC) could either divest its finance company subsidiary, UB Finance Company Limited (UBF) or infuse further capital to meet the minimum regulatory capital, which is coming due by the end of this year as attempts to find suitors to infuse capital failed to materialise. 
UBC as its ultimate parent didn’t infuse capital in 2018 when UBF first fell non-compliant with regulatory minimum core capital requirement from March 2018 and capital adequacy requirement since January 2019 as the company said it was in the process of raising a sizeable capital from an external investor. 

But the pandemic had crushed such hopes in courting potential investors.

Due to continuous non-compliance with capital requirements, the company is now under stringent deposit and lending caps, which were initially imposed in January 2019.  

Now the UBC is planning to either divest its problem child or infuse capital to make it up to the regulatory minimum, according to the rating agency, ICRA Lanka.  

“ICRA Lanka takes note and continues to monitor the performance of subsidiary of the bank, UB Finance Company Limited where the bank is planning to either divest the subsidiary completely or to infuse further capital to the subsidiary for it to meet the minimum regulatory capital requirement,” the rating agency said reaffirming UBC’s rating at SL BBB with a Stable outlook. 

ICRA Lanka estimates a fresh capital infusion of Rs.1.85 billion from UBC as required to meet the minimum regulatory core capital of Rs.2.5 billion by December 31, 2021, under the deferred time frame allowed by the Central Bank last year considering the adverse impacts on non-bank lenders from the pandemic.   By March 2021, the company’s reported net-worth was at Rs.738 million whereas the minimum requirement at present is Rs.2.0 billion. Further the company’s core capital adequacy ratio and the total capital adequacy ratio was at 3.61 percent and 4.55 percent compared to the regulatory minimums of 6.50 percent and 10.50 percent respectively.

UBF’s capital deteriorated significantly since 2018 due to poor profitability and an adjustment required as per the revised regulatory capital computation norms and very specifically due to the one-time adjustment of Rs. 430 million on account of the IFRS-9 transition in March 2019.  

At present UBF operates with a lending cap of Rs.8.1 billion and a deposit cap of Rs.5.8 billion since August 2020 revised twice from an initial caps of Rs.9.8 billion and Rs.7.2 billion imposed in January 2019.   By March 2021, the company’s gross non-performing loans ratio was at 15.8 percent compared to the industry average of 11.3 percent.
In contrast, UBC operates with comfortable capital levels and ICRA Lanka expressed confidence that the bank would meet its Rs.20.0 billion minimum core capital level by the end of 2022 as required by the Central Bank with internal capital generation.  If required, its largest shareholder Cultural Financial Holdings also has the option of exercising the warrants, which will mature in September 2022.

Culture Financial Holdings has 70.84 percent stake in UBC and has regulatory permission to hold up to 75 percent till 2029, compared to the regulatory cap of 10 percent for a single party, before reducing it to 15 percent by 2029. UBC owns 73 percent stake in UBF which carries voting rights of up to 81 percent.