Union Bank: Below expectations on higher provisions : Goldman Sachs

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EARNINGS REVIEW
Union Bank (UNBK.BO)
Neutral
Below expectations on higher provisions for NPLs and pension
Gratuity, pension liability and NPLs hurt profit
Union Bank’s net profit for 2QFY2011 at Rs3bn was down 40% yoy (49%
below GSe and 53% below Bloomberg estimates). Higher NPL provisions
(2% of loans) at Rs6.3bn (GSe: Rs3.35bn) vs. Rs900mn in 1QFY11 and an
additional provision of Rs1.27 bn for gratuity were key reasons. The decline
would have been higher but for one-time tax refund of Rs1.24bn and higher
treasury gains and write-back of investment depreciation at Rs1.64 bn (GSe:
Rs700mn). The bank’s gross NPLs increased 29% qoq to Rs35.2 bn, with
incremental slippage ratio rising sharply up to 4.6% vs. 1QFY11’s 2.6%
(including agri debt waiver of Rs4.1 bn and large corporate loan slippage of
Rs2.25 bn –excluding which the slippage ratio was 2%). Another negative
was the estimated pension liability, which based on actuarial valuation, is
now expected to be Rs2.4 bn, double the earlier guidance. Positives: loan
growth remained strong at 27% yoy, NIM excluding one-time tax refund
(2.9%) and CASA ratio (32.7%) remained stable.

Adjusting down estimates for higher provisions

We cut our earnings estimates by 16%/6%/6% for FY11E/FY12E/FY13E. This
to factor higher treasury income, NPL and pension provisions. While the
results were disappointing and we expect the stock to remain weak in the
near term, we believe NPL ratio is likely close to peak at 2.9% and earnings
growth could bounce back in FY2012. We thus retain our Neutral rating
and 12m CAMELOT-based target price at Rs355, as we roll forward BVPS
by one quarter to September 2011. We note that our equity value would
theoretically increase to Rs406, if we were to base our valuation on our
March 2012E BVPS. Risk: Higher/lower NPL formation.