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Union Bank Of India (UNBK.BO)
3Q11 Results: Credit Costs Cut into Operating Gains
Maintain Sell as macro concerns, NIM compression to remain overhangs —
We raise our EVA-based target price to Rs325 per share – factoring in 5-7% lower
earnings (due to higher than expected credit costs) but offset by a roll forward to
Mar’12. We also benchmark our valuations based on a 1.3x FY12E P/BV (1.4x
earlier). We believe the continuing macro uncertainty, expectations of relatively
higher margin pressure near term and its weak asset quality performance will
remain an overhang on the stock. Maintain Sell (3L).
3Q11 profits up 9%; healthy operating but credit costs disappoint— 3Q11
was a relatively mixed quarter for Union. Profits increased 9% yoy (8% below our
estimates) and most operating parameters were healthy - NIMs expanded 9bps
qoq; loan growth was strong (+26% yoy) and expenses remained low. However,
the gains were offset by its high loan loss charges, asset quality that continued to
be precariously weak and sluggish fee income growth.
P&L: Margins up, but fees and credit costs a challenge — Union’s NIMs
expanded to 344bps (peaked, management guides to a 25-30bps near-term
moderation) and operating expenses remained modest (Cost/Income at 40%).
However, loan loss charges remained a key challenge, were elevated (1.3%
annualized credit costs in 3Q), should moderate only if macro sustains. Also, core
fee income growth (+7% yoy) was sluggish and remains a key improvement area
for the management. Overall, a mixed quarter – some gains, but the pain persists.
Balance sheet: Good growth, but at a cost — Union’s loan growth was robust
(26% yoy) driven primarily by retail and infrastructure. Management maintains a
25% growth guidance for FY11 – we believe quite aggressive. Deposits were up
24% yoy, well ahead of industry and while CASA mix improved (to 33.3%), it is well
below best-in-class peers. NPLs remained relatively high at 2.7% and so did
slippages (2.5% annualized in 3Q). Additionally, coverage levels at 70% suggest
little cushion if asset quality slips further in a tight macro environment.
Union Bank Of India
Valuation
Our target price of Rs325 is based on our EVA model, which we believe
captures the long-term value of the business and is a standard valuation
measure for our India banking coverage. We are factoring in a risk-free rate of
8.0%, with an industry average spread (200bps) and a longer term cost income
ratio of 37%. We also benchmark our target price on a 1.3x 1Yr Fwd PBV,
which translates to a fair value of Rs330. We believe Union should trade at a
10-15% discount to the larger banks like SBI and PNB, due to: 1) its lower
capital cushion which is likely to cap upside in a higher growth environment; 2)
its modest deposit mix, which increases dependence on wholesale funding; and
3) relatively higher NPLs and weaker coverage levels, which raise vulnerability
to a weaker economic environment. Additionally, Union's NIMs have come
under pressure and could remain subdued as its high cost bulk deposits are
likely to re-price with a lag. We use EVA as a primary methodology as we
believe it better adjusts for the relatively dynamic cost of capital, and as it is
usually the more conservative target price in a difficult interest rate
environment.
Risks
We rate Union Bank Low Risk, in-line with our quantitative risk rating system,
which tracks 260-day historical share price volatility. Key upside risks which
could sustain the shares above our target price include: 1) reversal in the
interest rate environment which could support NIMs, 2) easing of asset quality
pressures, 3) higher loan growth environment, and 4) improvement in its
deposit mix.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Union Bank Of India (UNBK.BO)
3Q11 Results: Credit Costs Cut into Operating Gains
Maintain Sell as macro concerns, NIM compression to remain overhangs —
We raise our EVA-based target price to Rs325 per share – factoring in 5-7% lower
earnings (due to higher than expected credit costs) but offset by a roll forward to
Mar’12. We also benchmark our valuations based on a 1.3x FY12E P/BV (1.4x
earlier). We believe the continuing macro uncertainty, expectations of relatively
higher margin pressure near term and its weak asset quality performance will
remain an overhang on the stock. Maintain Sell (3L).
3Q11 profits up 9%; healthy operating but credit costs disappoint— 3Q11
was a relatively mixed quarter for Union. Profits increased 9% yoy (8% below our
estimates) and most operating parameters were healthy - NIMs expanded 9bps
qoq; loan growth was strong (+26% yoy) and expenses remained low. However,
the gains were offset by its high loan loss charges, asset quality that continued to
be precariously weak and sluggish fee income growth.
P&L: Margins up, but fees and credit costs a challenge — Union’s NIMs
expanded to 344bps (peaked, management guides to a 25-30bps near-term
moderation) and operating expenses remained modest (Cost/Income at 40%).
However, loan loss charges remained a key challenge, were elevated (1.3%
annualized credit costs in 3Q), should moderate only if macro sustains. Also, core
fee income growth (+7% yoy) was sluggish and remains a key improvement area
for the management. Overall, a mixed quarter – some gains, but the pain persists.
Balance sheet: Good growth, but at a cost — Union’s loan growth was robust
(26% yoy) driven primarily by retail and infrastructure. Management maintains a
25% growth guidance for FY11 – we believe quite aggressive. Deposits were up
24% yoy, well ahead of industry and while CASA mix improved (to 33.3%), it is well
below best-in-class peers. NPLs remained relatively high at 2.7% and so did
slippages (2.5% annualized in 3Q). Additionally, coverage levels at 70% suggest
little cushion if asset quality slips further in a tight macro environment.
Union Bank Of India
Valuation
Our target price of Rs325 is based on our EVA model, which we believe
captures the long-term value of the business and is a standard valuation
measure for our India banking coverage. We are factoring in a risk-free rate of
8.0%, with an industry average spread (200bps) and a longer term cost income
ratio of 37%. We also benchmark our target price on a 1.3x 1Yr Fwd PBV,
which translates to a fair value of Rs330. We believe Union should trade at a
10-15% discount to the larger banks like SBI and PNB, due to: 1) its lower
capital cushion which is likely to cap upside in a higher growth environment; 2)
its modest deposit mix, which increases dependence on wholesale funding; and
3) relatively higher NPLs and weaker coverage levels, which raise vulnerability
to a weaker economic environment. Additionally, Union's NIMs have come
under pressure and could remain subdued as its high cost bulk deposits are
likely to re-price with a lag. We use EVA as a primary methodology as we
believe it better adjusts for the relatively dynamic cost of capital, and as it is
usually the more conservative target price in a difficult interest rate
environment.
Risks
We rate Union Bank Low Risk, in-line with our quantitative risk rating system,
which tracks 260-day historical share price volatility. Key upside risks which
could sustain the shares above our target price include: 1) reversal in the
interest rate environment which could support NIMs, 2) easing of asset quality
pressures, 3) higher loan growth environment, and 4) improvement in its
deposit mix.
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