TEXT-Fitch release on City Union Bank

(The following statement was released by the ratings agency)

May 16 - Fitch Ratings has today upgraded India-based City Union Bank's (CTBK.BO: Quote, Profile, Research) (CUB) Individual rating to 'D' from 'D/E'. At the same time, Fitch has affirmed the bank's National Long-term rating at 'A(ind)' and the rating of its INR500m Lower Tier 2 Subordinated debt programme at 'A(ind)'. The bank's Support rating has also been affirmed at '5'. The Outlook for the National Long-term rating is Stable.

The ratings reflect CUB's small regional franchise and average, although improving, asset quality. The upgrade of the Individual rating reflects the bank's improved capitalisation and sustained profitability, which has remained above system medians.

CUB's preferential allotment of INR1.6bn of equity in 2007 improved its total capital ratio to 14% at December 2007 from 12.3% in FY06. With the equity infusion, CUB's solvency measured in terms of net NPL/equity ratio improved to 8% at December 2007 from 28% in FY05; this is now comparable to the system median of 9.7% in FY07.

While CUB's net interest margin, 4% in FY07, remained wider than the system median of 3.5% due to its higher proportion of small and medium enterprise (SME) loans, the bank remains vulnerable to any rise in the cost of deposits, as the proportion of its 'low cost' current and savings deposits has declined to 20% as of December 2007 (24% in FY07) and is lower than the system median of 31% in FY07.

Like other Indian banks, higher recoveries and write-offs from delinquent accounts in a benign credit environment have led to an improvement in the bank's asset quality ratios (Gross NPL ratios decreased to 2.3% in December 2007 from 4.3% in FY06). While the bank has invested in improving its risk management systems, given its concentration of loans to regional SMEs and higher exposure to the 'sensitive' commercial real estate sector (8% of total loans), pressures on its asset quality cannot be ruled out. The bank's loan loss reserve coverage (55% in FY07) is lower than that of similar, 'old' private banks.

CUB was set up in 1904 in the south Indian state of Tamil Nadu. The bank's shareholding is diversified and the bank is listed on the local bourses. The bank lends primarily to SMEs through its 180 branches. About 78% of the bank's deposits and loans are sourced from its home state.