Union Bank of India: Time for a pause -RBS

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Union Bank of India
Time for a pause
Union Bank disappointed in 2QFY11 partly due to one-off items. Management
guides for 25% yoy loan growth in FY11 vs 4% ytd growth in 1HFY11. Further,
management has lowered FY11 RoA and RoE guidance to 1.17% and 22%,
respectively (vs 1.25% and 25% earlier). Hold; new Rs390 TP (from Rs353).


2QFY11: Strong core earnings; one-time costs, higher provisions drag down net profit
Adjusted for one-time Rs620m net interest on an income tax refund, net interest income (NII)
grew largely in line with our estimates. The high NII growth was largely the result of margin
expansion of about 80bp yoy (up 18bp qoq) to 3.21% in 2QFY11. Core fee income grew 9%
yoy (up 9.3% yoy in 1HFY11). Treasury gains (Rs1.3bn) were 25% of PBT vs 28% in
2QFY10 (13% in 1QFY11). The cost-to-income ratio spiked to 48%, partly due to a one-time
gratuity provision (Rs1.3bn) made during 2QFY11. The NPL provision charge was 52bp in
2QFY11 (7bp in 1QFY11), which included a one-time charge for bad loans under the
agriculture-debt waiver scheme. Thus, PAT of Rs3bn was much lower than we estimated.
Asset quality surprises negatively in 2QFY11, partly due to one-offs
Slippages were Rs17.6bn in 1HFY11 (Rs11.3bn in 2QFY11), including Rs4.2bn, on account
of slippage due to the agriculture debt waiver scheme. Excluding this one-off, the slippage
ratio was 1.3% of loans on a one-year lag basis, which appears high relative to peers.
Restructured loans totalled Rs51bn (4.1% of loans) and slippages to date from restructured
loans were about 11%, largely in line with the peer average. Our estimates factor in a 97bp
NPL charge in FY11F (vs 74bp in FY10).
2HFY11 guidance: Strong loan growth; asset quality to remain largely stable
Management guided for 3.1% NIM in FY11 (3.03% in 1HFY11). Further, its loan growth
target is 25% yoy for FY11 (up 4.0% ytd in 1HFY11). Note, we factor 18% yoy loan growth
into our estimates. Also, management targets a gross NPL ratio of 2.3% by March 2011 vs
2.8% in September 2010.
We cut our near-term earnings forecasts due to one-offs; Hold with new Rs390 TP
We cut our FY11F net profit by about 12%, partly due to the one-time gratuity charge.
However, we largely maintain our FY12-13 forecasts and roll forward valuations to FY12F
and, so, arrive at a revised Gordon-Growth-based target price of Rs390. At our TP, the stock
would trade at 1.7x FY12F adjusted (for net NPLs) book value and 6.9x FY12F earnings.