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Union Bank of India
F2Q11: Higher Provisions
Drive Miss, but Revenue
Progression Was Robust
Union Bank reported a profit of Rs3.0 bn in QE
Sep-10: Profits were down 50% QoQ and 40% YoY; our
estimate was Rs5.1 bn. The miss was driven by higher
loan loss and employee provisions. However, NII
progression was stronger than expected (+9% QoQ).
Loan loss provisions moved up: Loan loss provisions
increased to Rs6bn (200 bps of loans, annualized) from
Rs1bn in QE Jun-10. About 49% of the LLP this quarter
arose from expiry of the farm-loan waiver scheme. Other
slippages moved up to 2.3% from 2.1%. The bank
expects improvement in F2H2011.
Margins expanded by 18 bps QoQ: NIMs (adjusted for
IT refunds and agri-loan waiver) were at 3.21% (+18 bps
QoQ), helping drive NII growth of 9% QoQ. Union Banl
still has excess liquidity of 6% of IEA – this will provide
further support to margins as it is redeployed.
Employee expenses were higher, owing to
pension/gratuity provisions: Union is one of the few
SOE banks to start making provisions for second
pension option / gratuity. In this quarter, it provided
Rs2.5 bn (vs. Rs1.2 bn in the previous quarter). This
was partially offset by higher capital gains contribution.
in the bank’s revised second pension liability estimate
and marginally higher LLP. However, strong revenue
progression provides an offset and hence our earnings
estimates for F2011 and F2012 change by just -2%
each. We are forecasting an ROA of 1% for F2011 vs.
management guidance of 1.15-1.2%. The stock could
be volatile in the near term owing to asset quality
concerns. However, we believe that valuations are still
attractive at 6.3x F2012eearnings and 4.4x F2012
PPOP – hence we maintain our OW rating.
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