Union Bank Of India - Downgrade to U/P , NPL surge:: BofA ML

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Union Bank Of India
Downgrade to U/P on weak
earnings, NPL surge
􀂄 Downgrade to U/P on NPL surge, weak earnings
We downgrade Union Bank to Underperform following higher than est. rise in
slippages (up 80% qoq), pension provisions being almost 50% higher and net
profit (Rs3bn; down 40% yoy) being 50% below our estimates. Topline growth at
+65% yoy is key positive. We cut earnings by 12/8% for FY11/12E to capture
higher NPL provisions and pension costs. While ROE still high at 19%/ 21% for
FY11/12, stock may not trade beyond 1.7-1.8x FY12E adj. BV (Gordon model)
owing to weak earnings outlook and lingering NPL concerns. Keep PO at Rs410;
<5% upside potential.
Earnings disappoint across variables; Muted FY11 outlook
Topline growth at +65% yoy was driven by 27% loan growth and margins being
up 78bps yoy (steady qoq). Growth driven by retail loans. But all other variables
disappointed. Opex surged 50% on much higher pension costs. Fees too below
est. at <10% and NPL provisions up almost 6x due to the huge slippages. We
now estimate earnings growth to be muted at 4% in FY11; though may rebound
+30% in FY12 on a lower credit costs, topline and low base.
NPL rise disconcerting; though worst may be behind
NPL slippages surged by almost 80% qoq to Rs11bn, in part on agri debt waiver
NPL’s (45% of slippages). While this was expected, the rise in its non-agri related
NPL’s (export linked) is more disconcerting; even though we think the worst may
be behind us. NPL’s should be manageable, with gross NPL forecast at
2.6%2.3% in FY11/12; net NPL’s at 1.1%/0.8%. But it will hurt FY11 earnings