We are downgrading UNBK to HOLD
(from BUY) as it has reached our TP and
looks richly valued from a FY12
perspective. Our FY11 & FY12 outlook is
detailed below.
Outlook – Our loan-growth estimates are
23% for FY11 and 21% for FY12. We
expect an average NIM of 3% for FY11
and 3% for FY12, compared to 2.6% in
FY10. We are factoring in loan loss
provision of 59bps in FY11 and 55bps in
FY12, flat with respect to FY10 levels.
Why downgrade – We do not see any
significant re-rating catalysts for UNBK from the current valuation levels.
We neither expect loan growth to exceed our expected 23% for FY11,
nor any meaningful margin expansion beyond our estimate of 3%. UNBK
needs to raise capital (beyond the recent infusion of preference capital
from the Government) as its tier-1 ratio will range around 8.2% by FY12.
With no significant re-rating triggers and given a YTD return of 51%
versus 17% for the Sensex and 43% for the Bankex, we believe it is time
to book profits in UNBK.
Recall our thesis on UNBK – We have been very positive on
UNBK since our initiation on October 22, 2009 (read our note ‘A floating
opportunity’) with a TP of INR325 (which at that time was 30% above
consensus). We liked the story on the back of an expanding loan book
supported by NIM expansion. We subsequently increased our TP to
INR350 arguing for a multiple expansion up to 1.5x BV. The stock is now
trading close to these valuation levels and we recommend investors to
book profits.
Valuation
At our revised TP of INR380 (from INR350), the stock could trade at 1.5x
our FY12E adjusted BV for an ROE of 24.8%.Our target price is based
on a three-stage residual income model, which assumes a risk-free rate
of 8%, equity risk premium of 6%, beta of 1.1, terminal growth of 4% and
terminal COE of 10%. Risks to TP: lower-than-expected slippages, higher
credit growth, and continued inflow of global liquidity into the stock.
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