The ratings downgrade take into account UCO's weak operating and financial performance during Q4FY2017 and in FY2017 overall. Driven by consecutive years of losses during last two fiscals, and high levels of non-performing assets (NPA), the capitalisation levels and solvency profile remain weak for the bank.

It also takes into account the unfavourable outlook on the bank's profitability amid high NPAs and the consequent challenges which the bank is likely to face to meet the increasing capital requirements under Basel III regulations.

The bank's asset quality remains weak with gross and net NPAs of 17.13% and 8.94% respectively as on March 31, 2017 as compared with 15.44% and 9.09% respectively as on March 31, 2016. With the standstill clause being applicable on asset classification under various schemes on resolution of stressed assets, UCO has a large number of loans continuing to be classified as standard accounts.

Hence the reported asset quality is likely to deteriorate further going forward. The rise in NPAs and the consequent income reversals led to a decline in the bank's net interest income (NII) by 21.27% in FY2017.

The bank's operating expenses also increased by 5.78% during the year. UCO's core operating profits consequently declined by 41.8% to Rs 16.85 billion, which were not adequate to absorb the high credit provisions during the year, resulting in a net loss of Rs 18.50 billion during FY2017.

Shares of the bank declined Rs 0.55, or 1.57%, to settle at Rs 34.50. The total volume of shares traded was 80,145 at the BSE (Tuesday).