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Union Bank (UNBK.BO)
Neutral Equity Research
Above expectations on higher NII; retain Neutral
What surprised us
Union Bank of India (UNBK) reported net profit for 3QFY11 at Rs5.8bn, up
8% yoy (3% ahead of GSe), driven by strong NII. Key takeaways: (1) NII
was strong at Rs16.2bn (up 52% yoy), 11% ahead of GSe driven by (i) 10bp
qoq expansion in reported NIMs to 3.44% on likely loan re-pricing, (ii)
higher income on investments (+32% yoy), and 26% yoy credit growth. (2)
Total provisions were 74% higher than GSe, as UNBK booked higher than
expected loan loss provisions (1.2% of loans) at Rs4.1bn (GSe: Rs2.3bn).
Management expects credit costs to decline to 50-60bp by FY12.The bank’s
gross NPLs grew by only 2% qoq to Rs35.8 bn (2.7% of loans), with
annualized slippage ratio at 2.9% down from 4.6% in Q2 and 3.4% in
Q4FY10. Net NPLs grew 9% qoq to 1.2%, while coverage ratio remaining
steady qoq at around 70%. Cumulative slippages for UNBK is c.15% of
total restructured loans as of Q3 end. (4) Costs came in 8% lower as we
expected as employee costs declined 12% qoq (+60% yoy). UNBK made
Rs1.2bn provision towards pension liability (total estimated liability of
Rs24bn) and Rs630mn towards gratuity in Q3. We are estimating
cost/income ratio to trend down by 100bp yoy over FY12E. (5) Non interest
income was 12% ahead of GSe, driven by higher investment and FX
income.
What to do with the stock
We revise our earnings estimates by -3%/-4.9%/+1.8% for
FY11E/FY12E/FY13E, to factor lower fee income partially offset by higher
NII. Subsequently, we reduce our 12m CAMELOT-based target price to
Rs395 (from Rs405), Downside risk: Higher NPL formation; Upside risk:
Higher NIMs on improving CASA, and/or higher fee income.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Union Bank (UNBK.BO)
Neutral Equity Research
Above expectations on higher NII; retain Neutral
What surprised us
Union Bank of India (UNBK) reported net profit for 3QFY11 at Rs5.8bn, up
8% yoy (3% ahead of GSe), driven by strong NII. Key takeaways: (1) NII
was strong at Rs16.2bn (up 52% yoy), 11% ahead of GSe driven by (i) 10bp
qoq expansion in reported NIMs to 3.44% on likely loan re-pricing, (ii)
higher income on investments (+32% yoy), and 26% yoy credit growth. (2)
Total provisions were 74% higher than GSe, as UNBK booked higher than
expected loan loss provisions (1.2% of loans) at Rs4.1bn (GSe: Rs2.3bn).
Management expects credit costs to decline to 50-60bp by FY12.The bank’s
gross NPLs grew by only 2% qoq to Rs35.8 bn (2.7% of loans), with
annualized slippage ratio at 2.9% down from 4.6% in Q2 and 3.4% in
Q4FY10. Net NPLs grew 9% qoq to 1.2%, while coverage ratio remaining
steady qoq at around 70%. Cumulative slippages for UNBK is c.15% of
total restructured loans as of Q3 end. (4) Costs came in 8% lower as we
expected as employee costs declined 12% qoq (+60% yoy). UNBK made
Rs1.2bn provision towards pension liability (total estimated liability of
Rs24bn) and Rs630mn towards gratuity in Q3. We are estimating
cost/income ratio to trend down by 100bp yoy over FY12E. (5) Non interest
income was 12% ahead of GSe, driven by higher investment and FX
income.
What to do with the stock
We revise our earnings estimates by -3%/-4.9%/+1.8% for
FY11E/FY12E/FY13E, to factor lower fee income partially offset by higher
NII. Subsequently, we reduce our 12m CAMELOT-based target price to
Rs395 (from Rs405), Downside risk: Higher NPL formation; Upside risk:
Higher NIMs on improving CASA, and/or higher fee income.
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