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Union Bank of India (UBI) reported moderate 8.5% yoy (91.0% qoq) growth in net
profit to `580cr mainly on a low base and in line with our estimate of `594cr.
However, the bank reported provisioning expenses of over 80.9%, which
exceeded our estimate and was offset by higher non-interest income. We
recommend a Buy on the stock.
Operating performance on expected lines; slippages disappoint: Global advances
grew by a healthy 7.8% sequentially and 25.8% yoy to `133,787cr, while global
deposits grew by 5.0% sequentially and 23.5% yoy to `186,655cr. The bank’s
CASA deposits grew by an impressive 27.1% yoy and 6.9% sequentially to
`62,106cr, leading to an improvement in CASA ratio to 33.4% from 32.3% in
3QFY2010 and 32.7% in 2QFY2011. During the quarter, non-interest income
increased by 6.1% yoy, but declined by 3.3% sequentially to `493cr on account of
lower treasury gains. The cost-to-income ratio stood at 40.2% as compared to
44.7% in 2QFY2011. The bank witnessed delinquencies amounting to `765cr
during 3FY2011 (down from `1,130cr in 2QFY2011), while deductions were
~`708cr compared to `341cr in 2QFY2011. Annualised slippage improved from
3.7% in 2QFY2011 to 2.5% in 3QFY2011, which is still considerably higher than
the industry average.
Outlook and valuation: UBI is structurally among the more profitable and
competitive PSU banks. We are positive on UBI due to robust traction in its CASA
deposits and relatively fast-expanding branch network, due to which we expect
the bank’s performance on the NII front to be better than peers over FY2011-12.
Post the recent correction, the stock is trading at 1.4x FY2012E P/ABV. Hence, we
recommend a Buy on the stock, with a Target Price of `389, based on 1.6x
FY2012E P/ABV and implying an upside of 15.2% from current levels.
Growth in advances was driven by the medium and large corporates segment
(33.8% yoy) and the retail segment (28.5 yoy). On a yoy basis, education loans
grew by 24.0% yoy, while home loans grew by 17.0%.
During the quarter, the bank opened 124 branches and 96 ATMs, taking its total
network to 2,993 branches and 2,516 ATMs. The steadily growing network is
expected to help the bank in further improving its CASA ratio. The bank targets to
achieve a CASA ratio of 35.0% by FY2012.
The yield on funds increased sequentially by 11bp, while the cost of funds
increased by 10bp, leading to an improvement in reported NIMs by 9bp to 3.44%
from 3.35% in 2QFY2011.
For FY2011, management has given guidance of advances and deposits growth of
25% and 20%, respectively. We are presently factoring in 18% loan growth and
15% deposits growth for FY2011.
Non-interest income muted
During the quarter, non-interest income increased by 6.1% yoy, but declined by
3.3% sequentially to `493cr on account of lower treasury gains. Profit from sale of
investments declined by 17.6% yoy and 42.2% qoq to `108cr, while fee income
was flattish sequentially at `230cr. Forex income surged by 188.4% yoy and
49.4% sequentially to `124cr.
Operating costs decline sequentially
During the quarter, operating expenses decreased by 7.3% qoq, but increased by
37.9% yoy to `848cr. The cost-to-income ratio stood at 40.2% as compared to
44.7% in 2QFY2011 and 40.2% in 3QFY2010. The total liabilities due to second
pension liability stood at ~`2,400cr. During the quarter, the bank provided `64cr
for gratuity and `120cr for pension liabilities as provisions, similar to last quarter,
and is expected to maintain the same amortisation rate for pension liabilities going
forward as well.
Asset quality pressure persists
The bank witnessed delinquencies amounting to `765cr during 3FY2011 (down
from `1,130cr in 2QFY2011), while deductions were ~`708cr as compared to
`341cr in 2QFY2011. The increase in deductions sequentially was on account of
higher write-offs of `452cr as against `153cr in 2QFY2011. Annualised slippage
improved from 3.7% in 2QFY2011 to 2.5% in 3QFY2011, which is however still
considerably higher than the industry average.
Gross NPAs increased by 1.6% qoq to `3,580cr, while net NPAs grew by 9.3% qoq
to `1,597cr. The NPA provisioning expense for the quarter at ~0.7% of the total
average assets is relatively high compared to the industry average. The bank’s
provision coverage ratio stood at 70.2% including technical write-offs, just above
the mandated level of 70.0%.
Management indicated that the high slippage ratio is a combination of various
factors such as high level of restructuring seen during the last few quarters due to
agriculture relief scheme, exposure to large corporates in delinquency prone
sectors such as exports and metals. Management expects delinquency levels at
2.5-2.6% towards the year end, but expects the slippage ratio to decline to
manageable levels of 1.0-1.3% by FY2012. We have accordingly factored in 35%
yoy decline in provision expenses in FY2012.
Stable capital adequacy
During the quarter, the bank’s capital adequacy ratio (CAR) stood at 11.9%, with
tier-1 capital at 7.4% and tier-2 at 4.4%. If the nine months profit of `1,484cr is
included in tier-1 capital, CAR improves to a strong 14% with tier-1 capital at
8.5%.
Investment arguments
Strong traction visible in CASA deposits
We are relatively positive on the bank’s CASA growth outlook, owing to its large
branch expansion plans compared to its peers. The bank has been able to sustain
CASA above 32% over the past few quarters. During 3QFY2011, the bank
registered strong 33.4% yoy growth in savings account deposits, reflecting the
strong traction in the more sustainable SA deposits.
Outlook and valuation
In our view, UBI is structurally among the more profitable and competitive PSU
banks. We have a positive outlook on the bank due to its robust traction in CASA
deposits and relatively fast-expanding branch network, due to which we expect its
performance on the NII front to be better than peers over FY2011–12. Post the
recent correction, the stock is trading at 1.4x FY2012E P/ABV. Hence, we
recommend a Buy on the stock, with a Target Price of `389, based on 1.6x
FY2012E P/ABV and implying an upside of 15.2% from current levels.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Union Bank of India – 3QFY2011 Result Update
Angel Broking recommends a Buy on Union Bank of India with a Target Price of Rs. 389.
Union Bank of India (UBI) reported moderate 8.5% yoy (91.0% qoq) growth in net
profit to `580cr mainly on a low base and in line with our estimate of `594cr.
However, the bank reported provisioning expenses of over 80.9%, which
exceeded our estimate and was offset by higher non-interest income. We
recommend a Buy on the stock.
Operating performance on expected lines; slippages disappoint: Global advances
grew by a healthy 7.8% sequentially and 25.8% yoy to `133,787cr, while global
deposits grew by 5.0% sequentially and 23.5% yoy to `186,655cr. The bank’s
CASA deposits grew by an impressive 27.1% yoy and 6.9% sequentially to
`62,106cr, leading to an improvement in CASA ratio to 33.4% from 32.3% in
3QFY2010 and 32.7% in 2QFY2011. During the quarter, non-interest income
increased by 6.1% yoy, but declined by 3.3% sequentially to `493cr on account of
lower treasury gains. The cost-to-income ratio stood at 40.2% as compared to
44.7% in 2QFY2011. The bank witnessed delinquencies amounting to `765cr
during 3FY2011 (down from `1,130cr in 2QFY2011), while deductions were
~`708cr compared to `341cr in 2QFY2011. Annualised slippage improved from
3.7% in 2QFY2011 to 2.5% in 3QFY2011, which is still considerably higher than
the industry average.
Outlook and valuation: UBI is structurally among the more profitable and
competitive PSU banks. We are positive on UBI due to robust traction in its CASA
deposits and relatively fast-expanding branch network, due to which we expect
the bank’s performance on the NII front to be better than peers over FY2011-12.
Post the recent correction, the stock is trading at 1.4x FY2012E P/ABV. Hence, we
recommend a Buy on the stock, with a Target Price of `389, based on 1.6x
FY2012E P/ABV and implying an upside of 15.2% from current levels.
Strong business growth
Global advances grew by a healthy 7.8% sequentially and a healthy 25.8% yoy to
`133,787cr, while global deposits grew by 5.0% sequentially and 23.5% yoy to
`186,655cr. Current account deposits increased 11.5% yoy, but fell marginally by
2.4% qoq to `15,690cr. Saving account (SA) deposits grew by a healthy 33.4% yoy
and 10.4% qoq to `46,416cr. Consequently, the bank’s CASA deposits grew by an
impressive 27.1% yoy and 6.9% sequentially to `62,106cr, leading to an
improvement in CASA ratio to 33.3% from 32.3% in 3QFY2010 and 32.7% in
2QFY2011.
Credit off-take picked up this quarter with the incremental CD ratio standing at
108.7%, leading to improvement in the CD ratio from 69.8% in 2QFY2011 to
71.7% in 3QFY2011
Growth in advances was driven by the medium and large corporates segment
(33.8% yoy) and the retail segment (28.5 yoy). On a yoy basis, education loans
grew by 24.0% yoy, while home loans grew by 17.0%.
During the quarter, the bank opened 124 branches and 96 ATMs, taking its total
network to 2,993 branches and 2,516 ATMs. The steadily growing network is
expected to help the bank in further improving its CASA ratio. The bank targets to
achieve a CASA ratio of 35.0% by FY2012.
The yield on funds increased sequentially by 11bp, while the cost of funds
increased by 10bp, leading to an improvement in reported NIMs by 9bp to 3.44%
from 3.35% in 2QFY2011.
For FY2011, management has given guidance of advances and deposits growth of
25% and 20%, respectively. We are presently factoring in 18% loan growth and
15% deposits growth for FY2011.
Non-interest income muted
During the quarter, non-interest income increased by 6.1% yoy, but declined by
3.3% sequentially to `493cr on account of lower treasury gains. Profit from sale of
investments declined by 17.6% yoy and 42.2% qoq to `108cr, while fee income
was flattish sequentially at `230cr. Forex income surged by 188.4% yoy and
49.4% sequentially to `124cr.
Operating costs decline sequentially
During the quarter, operating expenses decreased by 7.3% qoq, but increased by
37.9% yoy to `848cr. The cost-to-income ratio stood at 40.2% as compared to
44.7% in 2QFY2011 and 40.2% in 3QFY2010. The total liabilities due to second
pension liability stood at ~`2,400cr. During the quarter, the bank provided `64cr
for gratuity and `120cr for pension liabilities as provisions, similar to last quarter,
and is expected to maintain the same amortisation rate for pension liabilities going
forward as well.
Asset quality pressure persists
The bank witnessed delinquencies amounting to `765cr during 3FY2011 (down
from `1,130cr in 2QFY2011), while deductions were ~`708cr as compared to
`341cr in 2QFY2011. The increase in deductions sequentially was on account of
higher write-offs of `452cr as against `153cr in 2QFY2011. Annualised slippage
improved from 3.7% in 2QFY2011 to 2.5% in 3QFY2011, which is however still
considerably higher than the industry average.
Gross NPAs increased by 1.6% qoq to `3,580cr, while net NPAs grew by 9.3% qoq
to `1,597cr. The NPA provisioning expense for the quarter at ~0.7% of the total
average assets is relatively high compared to the industry average. The bank’s
provision coverage ratio stood at 70.2% including technical write-offs, just above
the mandated level of 70.0%.
Management indicated that the high slippage ratio is a combination of various
factors such as high level of restructuring seen during the last few quarters due to
agriculture relief scheme, exposure to large corporates in delinquency prone
sectors such as exports and metals. Management expects delinquency levels at
2.5-2.6% towards the year end, but expects the slippage ratio to decline to
manageable levels of 1.0-1.3% by FY2012. We have accordingly factored in 35%
yoy decline in provision expenses in FY2012.
Stable capital adequacy
During the quarter, the bank’s capital adequacy ratio (CAR) stood at 11.9%, with
tier-1 capital at 7.4% and tier-2 at 4.4%. If the nine months profit of `1,484cr is
included in tier-1 capital, CAR improves to a strong 14% with tier-1 capital at
8.5%.
Investment arguments
Strong traction visible in CASA deposits
We are relatively positive on the bank’s CASA growth outlook, owing to its large
branch expansion plans compared to its peers. The bank has been able to sustain
CASA above 32% over the past few quarters. During 3QFY2011, the bank
registered strong 33.4% yoy growth in savings account deposits, reflecting the
strong traction in the more sustainable SA deposits.
Outlook and valuation
In our view, UBI is structurally among the more profitable and competitive PSU
banks. We have a positive outlook on the bank due to its robust traction in CASA
deposits and relatively fast-expanding branch network, due to which we expect its
performance on the NII front to be better than peers over FY2011–12. Post the
recent correction, the stock is trading at 1.4x FY2012E P/ABV. Hence, we
recommend a Buy on the stock, with a Target Price of `389, based on 1.6x
FY2012E P/ABV and implying an upside of 15.2% from current levels.
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