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Union Bank (UNBK)
Banks/Financial Institutions
Margins expand; not much respite on NPLs yet. A tight liquidity environment is
resulting in reasonable pricing power, resulting in further margin improvement – NIMs
up by 20 bps qoq to 3.4%. However, asset quality continued to disappoint with
slippages remaining high at 2.4%, even as it has improved from 2Q levels. Earnings
growth to remain attractive in FY2012-13E, despite pressure on margins, on the back of
lower credit costs. Valuations are attractive at 1.3X FY2012E PBR and 6X FY2012E PER,
for a 22-23% RoE bank. BUY.
Higher margins providing comfort on credit costs; maintain BUY
Union Bank reported better-than-expected 3QFY11 earnings, as margins expanded by 20 bps qoq,
even as slippages remained high during the quarter. Higher margins are cushioning the impact of
retirement costs and fresh slippages, enabling the bank to maintain RoEs over 20%. The
management guides for lower margins and lower slippages in FY2012E. While earnings will be
flattish for FY2011E, we expect a 28% earnings growth for FY2012E and 20% in FY2013E. We
revise earnings marginally by 4% for FY2012E and FY2013E. Retain BUY with a target price of
`420 (`450 earlier).
Margins improve 23 bps qoq to 3.4% led by higher yields on funds
In line with other banks that reported so far, margins for Union Bank of India expanded 9 bps qoq
to 3.4% (23 bps excluding one-off impact in 2QFY11). Improvement was mainly driven by higher
yields on the investment and lending portfolio. Net interest income (NII) was at `16.2 bn in
3QFY11, a healthy growth of 52% yoy (5% qoq). Partial impact of rise in PLR was visible during
the quarter with lending yields improving by 40 bps qoq while yield on investments improved 20
bps. Cost of deposits increased by 12 bps qoq to 5.5%. CD ratio for the quarter was flat at 72%.
On the back of strong performance we have marginally revised our NIMs assumptions for FY2012-
13E but factoring a decline of 20 bps in 4QFY11E and 15 bps in FY2012E.
Pace of fresh NPL formations slows; gross NPL low on higher write-offs
Fresh slippages were lower at 2.4% compared to peak levels indicated by the management of
3.6% in 2QFY11 giving some comfort on asset quality. Gross NPL was flat for the quarter despite
higher-than-normalized slippages on the back of higher write-offs (1.4% of loans annualized)
while net NPL increased by 9% qoq to `16 bn. Provision coverage level was marginally lower due
to write-offs but is above regulatory requirements including technically written off portfolio. We
expect credit costs to be a primary driver of profitability on the back of lower slippages and better
recoveries. Restructured loans were unchanged at 4% of loans but outstanding slippage from this
portfolio is at 18% (nearly a third of slippages reported this quarter slipped from this portfolio).
Cost-income ratio at 40%; retirement costs yet to be finalized
Cost income ratio was at 40% for the quarter as operating expenses increased by 38% yoy
(declined 7% qoq) with employee expenses growing by 60% (declined 12% qoq) as the
bank made provisions pertaining to retirement benefits. Of the total expenses, the bank
provided `5.2 bn for staff expenses of which `1.3 bn was for gratuity and `1.2 bn for
pension (similar to 1Q and 2Q). The management is yet to finalize the impact of the second
pension provision and is currently making an ad hoc provision on the same.
Loan growth shows improvement; low base masks YTD growth of 10%
Loan growth for the quarter showed marked improvement compared to 1HFY11
performance with 6% qoq. However, YTD performance of 10% is below industry average of
15%. For the quarter corporate loan growth was at 6% (34% yoy), agriculture at 8% (10%
yoy) and retail loans at 5% (29% yoy). SME loans have slowed in recent months at 4% qoq.
We are building loan growth of 17% in FY2011E (lower than management expectations of
25%) and 18% CAGR in FY2012-13E.
Resource mobilization continues to remain strong, ahead of industry average, with deposits
growing at 5% qoq (24% yoy). CASA ratio for the quarter was maintained at 33% qoq but
savings deposits are going impressively at 33% yoy.
Core fees growth muted at 7% yoy; exchange income drives growth
Core fee income slowed down for the quarter to 7% as the impact of higher base is
catching up but higher exchange income of 49% yoy resulted in overall non-interest income
to grow by 6% yoy. Treasury profit was healthy and well above our estimates at `1.1 bn
(down 18% yoy)
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Union Bank (UNBK)
Banks/Financial Institutions
Margins expand; not much respite on NPLs yet. A tight liquidity environment is
resulting in reasonable pricing power, resulting in further margin improvement – NIMs
up by 20 bps qoq to 3.4%. However, asset quality continued to disappoint with
slippages remaining high at 2.4%, even as it has improved from 2Q levels. Earnings
growth to remain attractive in FY2012-13E, despite pressure on margins, on the back of
lower credit costs. Valuations are attractive at 1.3X FY2012E PBR and 6X FY2012E PER,
for a 22-23% RoE bank. BUY.
Higher margins providing comfort on credit costs; maintain BUY
Union Bank reported better-than-expected 3QFY11 earnings, as margins expanded by 20 bps qoq,
even as slippages remained high during the quarter. Higher margins are cushioning the impact of
retirement costs and fresh slippages, enabling the bank to maintain RoEs over 20%. The
management guides for lower margins and lower slippages in FY2012E. While earnings will be
flattish for FY2011E, we expect a 28% earnings growth for FY2012E and 20% in FY2013E. We
revise earnings marginally by 4% for FY2012E and FY2013E. Retain BUY with a target price of
`420 (`450 earlier).
Margins improve 23 bps qoq to 3.4% led by higher yields on funds
In line with other banks that reported so far, margins for Union Bank of India expanded 9 bps qoq
to 3.4% (23 bps excluding one-off impact in 2QFY11). Improvement was mainly driven by higher
yields on the investment and lending portfolio. Net interest income (NII) was at `16.2 bn in
3QFY11, a healthy growth of 52% yoy (5% qoq). Partial impact of rise in PLR was visible during
the quarter with lending yields improving by 40 bps qoq while yield on investments improved 20
bps. Cost of deposits increased by 12 bps qoq to 5.5%. CD ratio for the quarter was flat at 72%.
On the back of strong performance we have marginally revised our NIMs assumptions for FY2012-
13E but factoring a decline of 20 bps in 4QFY11E and 15 bps in FY2012E.
Pace of fresh NPL formations slows; gross NPL low on higher write-offs
Fresh slippages were lower at 2.4% compared to peak levels indicated by the management of
3.6% in 2QFY11 giving some comfort on asset quality. Gross NPL was flat for the quarter despite
higher-than-normalized slippages on the back of higher write-offs (1.4% of loans annualized)
while net NPL increased by 9% qoq to `16 bn. Provision coverage level was marginally lower due
to write-offs but is above regulatory requirements including technically written off portfolio. We
expect credit costs to be a primary driver of profitability on the back of lower slippages and better
recoveries. Restructured loans were unchanged at 4% of loans but outstanding slippage from this
portfolio is at 18% (nearly a third of slippages reported this quarter slipped from this portfolio).
Cost-income ratio at 40%; retirement costs yet to be finalized
Cost income ratio was at 40% for the quarter as operating expenses increased by 38% yoy
(declined 7% qoq) with employee expenses growing by 60% (declined 12% qoq) as the
bank made provisions pertaining to retirement benefits. Of the total expenses, the bank
provided `5.2 bn for staff expenses of which `1.3 bn was for gratuity and `1.2 bn for
pension (similar to 1Q and 2Q). The management is yet to finalize the impact of the second
pension provision and is currently making an ad hoc provision on the same.
Loan growth shows improvement; low base masks YTD growth of 10%
Loan growth for the quarter showed marked improvement compared to 1HFY11
performance with 6% qoq. However, YTD performance of 10% is below industry average of
15%. For the quarter corporate loan growth was at 6% (34% yoy), agriculture at 8% (10%
yoy) and retail loans at 5% (29% yoy). SME loans have slowed in recent months at 4% qoq.
We are building loan growth of 17% in FY2011E (lower than management expectations of
25%) and 18% CAGR in FY2012-13E.
Resource mobilization continues to remain strong, ahead of industry average, with deposits
growing at 5% qoq (24% yoy). CASA ratio for the quarter was maintained at 33% qoq but
savings deposits are going impressively at 33% yoy.
Core fees growth muted at 7% yoy; exchange income drives growth
Core fee income slowed down for the quarter to 7% as the impact of higher base is
catching up but higher exchange income of 49% yoy resulted in overall non-interest income
to grow by 6% yoy. Treasury profit was healthy and well above our estimates at `1.1 bn
(down 18% yoy)
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