Fitch Revises Union Bank's Outlook

Fitch Ratings Lanka has revised Union Bank of Colombo PLC's (UB) Outlook to Negative from Stable. Its National Long-Term rating has been affirmed at 'BB+(lka)'. The Negative Outlook reflects UB's operational risks, given the nature of its disparate IT systems, weak operational branch procedures, while loan growth was high at 56.5% in nine months ended September 2011 (9M11).

The rating reflects UB's moderate asset quality and lack of a broad deposit base. The rating also reflects the challenges to the scalability of its operations given operational weaknesses and the impact on profitability of its holding of low-yielding deep-discount bond (DDB), which was part of the 2003 balance sheet restructuring.

The implementation of necessary risk management systems and processes (including the bank's proposed implementation of a core banking system) would enable UB to manage its expansion plans and may result in the Outlook being revised to Stable. Any further delays in the implementation of the core banking system or delays in the correction of highlighted operational risks would be negative for the rating.

UB's loans grew by 56.5% in Q311, with overdrafts and term loans accounting for 35% and 34% of loans, respectively, at Q311 (2010: 39% and 24%). Furthermore, its loans had a sizable exposure to the trade sector. Non-performing loan ratio improved to 3.5% at Q311 from 8.2% at FYE10, due to concerted recoveries and loan growth.