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Union Bank of India |
Provisioning hits bottom-line; downgrade to HOLD |
HOLD
CMP: Rs393 Target Price: Rs400
n UBI’s Q2FY11 net profit at Rs3.0bn (-40%yoy), significantly below expectation led by higher provisioning and opex
n The NII at 15.4bn inline with expectation, led by 30bps expansion in NIMs, albeit advances remaining flat qoq
n The slippages during the quarter were higher at Rs11.3bn (3.6% annualised) including Rs4.2bn from agriculture NPAs, Rs760mn from restructured pool & Rs2.2bn from one big a/c
n Valuations expensive at 1.7x FY12E looking at sharp slippages and provision requirements. Downgrade to HOLD rating with TP of Rs400
NII growth inline with expectations
The NII (reported) grew by a 72.6% yoy to 15.4bn led by 30bps expansion in NIM’s to
3.0%, albeit advances remain flat qoq at Rs1.2tn (1.3%qoq).
Adjusted for one off interest income of Rs620mn, the growth in NII would have been
65%. The other interest income includes one off income of Rs620mn, which pertains to
interest on Income Tax refunds (1.2bn) and a negative impact of reversal of interest
income on agriculture NPAs (620mn).
Slippages continue to remain high
The slippages during the quarter were at Rs11.3bn (3.6% annualised) including Rs4.2bn for
agriculture NPAs and Rs760mn from restructured pool. Of the remaining 6.3bn slippage,
Rs2.2bn was on account of one big account slipping during the quarter. Adjusted for all
these, the normal slippages during the quarter were lower at Rs4.1bn (1.3% annualized) as
compare to Rs6.2bn in the preceding quarter (2% annualized).
We believe that the normal slippages in coming quarter may remain higher than Q2FY11
(but lower than earlier quarters) as the bank has restructured few large corporate accounts
during the quarter totaling to Rs1bn which may slip in coming quarters.
May see further capital infusion
The management has guided towards an equity infusion from the government as the tier I
CAR at 7.86% remains lower compared with it peers and also as the net NPAs to net worth
has gone up to 13% now. During the quarter, the bank has already received Rs1.1bn in
terms of preference share capital.
Valuations and view
The stock is currently quoting at 1.7x FY12E ABV. We find the valuations expensive looking
at higher slippages and imminent spike in the provision costs. We have built in slippages of
1.6% and provision cost of 80bps for FY11.
We have downgraded our earnings estimates by 20%/5% and ABV estimates by 7%/9%
each for FY11E/12E. We downgrade our rating from BUY to HOLD with price target of
Rs400 (Rs440 earlier).
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