UNION BANK OF INDIA Higher retirement dent bottom line :: Edelweiss,

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UNION BANK OF INDIA
Higher retirement and credit costs dent bottom line


Union Bank of India (UBI) reported a PAT of INR 3 bn (down 40% Y-o-Y, 50% Q-o-
Q), significantly below our estimate of INR 5.7 bn due to higher-than-expected credit
costs and provisions for second pension and gratuity. NII (adjusted for one off of INR
620 mn) came in at INR 14.7 bn (up 71% Y-o-Y, 9% Q-o-Q) ahead of our estimate of
INR 13.8 bn. Margins, excluding the one off, improved 18bps sequentially to 3.21%.
The bank’s slippage came in higher than expected at 3.6% (2.3% excluding one-off
agri NPLs) while recoveries/upgradations could not keep pace. Provision coverage
stood at 59% (70% including the write off). Staff expenses surged 36% sequentially
as the bank provided INR 2.47 bn towards second pension option and gratuity,
higher than the initial guidance.
􀂄 Asset quality peaks at a higher than expected level; slippages to decline
going forward
Slippages came in higher than the earlier guidance at INR 11.3 bn (3.6%)
against INR 6.2 bn (2.1%) in the previous quarter. While agri debt contributed
INR 4.15 bn to total slippages, INR 3.1 bn came from three large accounts that
slipped due to the global meltdown. INR 358 mn (0.7%) of restructured book
slipped during the quarter, taking total slippages in the restructured book to
11.3% (below management guidance of 15%). Management guided that pace of
slippages is expected to reduce and it expects to curtail GNPL at 2.3% (against
2.1% target given in the previous quarter). This will lead to GNPL settling at ~
INR 33.5-34 bn. During the quarter, INR 360 mn of advances (0.7% of loan
book) were added to the restructured book; the high level of stressed assets
(GNPA + restructured assets) of 6.9% of loan book is a key monitorable.
􀂄 Outlook and valuations: NPL set to recede; maintain ‘BUY’
We believe concerns on asset quality are receding as slippages have peaked in
Q2FY11, although at a higher level and recoveries/upgradation will strengthen
over subsequent quarters. Moreover, the margin performance looks sustainable
(compared with peers) due to lower proportion of wholesale deposits and
cushion on CD ratio. However, given higher-than-expected slippages
(consequently higher loan loss provisions) and reported pension liabilities we
revise our EPS estimate for FY11 and FY12 down 9% and 2%, respectively. The
stock is currently trading 1.6x FY12E adjusted book for a bank delivering
average RoE of 24% over FY11-12E. We maintain ‘BUY/Sector Outperformer’
recommendation/rating on the stock.