Union Bank of India — Season of Migration- Sept 2010 RESULT UPDATE:: Ambit

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RESULT UPDATE
Union Bank of India — Season of Migration

Towards a new ‘Normal’

• NII growth stays strong at above 70%
• Sharp NPA spike pushes provisioning, drags bottomline
• System-driven recognition likely to set new normal for retail NPAs
• One-off delinquencies could normalize from current levels
• Business growth targets appear unrealistic; our forecasts more modest
• Expect near-term under-performance vis-à-vis peers
• Maintain ‘BUY’ with reduced 12-month TP of Rs450 (from Rs465)

Despite a high, above-70% growth in NII at Rs15.4bn, Union Bank delivered a disappointing bottomline with net profit clocking in at Rs3.03bn, less than half of what we expected, predominantly as a result of disproportionately high delinquencies during the quarter.

What's not evident? Despite having witnessed unprecedented NPA accretion during the quarter, interest income traction has been very strong. We read the interest income trajectory trends as signaling a high proportion of 'performing assets' within the reported NPAs, indicating a high possibility of incremental NPAs reported this quarter being partially reversed by end-Mar’11.
Valuation and recommendation: While we were already running with a higher NPA provisioning for FY11E, we have further upped our NPA provisioning estimates (derived from higher slippage assumptions). Post- today's correction of a little over 6%, the stock quotes at 1.6x our FY12E revised ABVPS estimates of Rs249. While we continue to maintain a 'BUY' recommendation on the stock, we believe that the stock may under-perform its PSU banking peers (PNB and BOB) in the near-term and hence, advise investors to accumulate UNBK on dips.