Union Bank of India Slippages continues to remain higher: Target : Rs370 -Emkay

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Union Bank of India

Slippages continues to remain higher

HOLD

CMP: Rs338                                        Target Price: Rs370

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n     UBI’s Q3FY11 earnings ahead of expectation led by higher NII growth and lower operating expenses.

n     The NII grew by 51.8%yoy to Rs16.2bn led by 7.8% qoq growth in advances and 22bps qoq improvement in margins at 3.4%

n     The slippages rate shot up to 0.61% from 0.33% in Q2FY11.  Includes one big ticket account of Rs~2.0bn. Slippages in Q4FY11 to remain high at same level

n     Valuations fair at 1.9x FY11E and 1.5x FY12 ABV looking at sharp slippages and provision requirements. We Maintain HOLD rating with TP of Rs370

NII growth ahead of expectations
UNBK’s NII for Q3FY11 has grown by 51.8% yoy (5.2% qoq) to Rs16.2bn led by 7.8%
qoq growth in advances and 22bps improvement in margins at 3.4%.
The other interest income in Q2FY11 includes one off income of Rs620mn, which
pertains to interest on Income Tax refunds (1.2bn) and a negative impact of reversal of
interest income on agriculture NPAs (620mn). Adjusted for which the NII growth would
have been higher at 9.6%qoq.

Advances grew by a strong 8%qoq
UBI’s advances for the quarter grew by a strong 7.8% qoq to Rs1.3tn, led by 9.7% qoq
increase in corporate advances and 7.5% qoq increase in Agri advances. Moreover
retail and SME also reported a healthy growth of 4.5%qoq and 4.1% qoq.

CASA mix improves despite strong balance sheet growth
The CASA mix improved by a healthy 58bps to 33.3% despite strong growth in balance
sheet. The advances grew by a strong 7.8%qoq to Rs1.3tn, while deposit growth was
equally strong at 5.0%qoq at Rs1.9tn. The growth in CASA was primarily driven by
10.4%qoq increase in saving deposits.

Other income growth subdued despite strong balance sheet growth
The other income growth was subdued at 6.0%yoy led by lower fee income growth, lesser
recovery and lower trading gains.

Opex ratio stable at 40% of income despite higher employee expenses
The opex ratio for the quarter stood at 40% of income despite the fact that UNBK has
provided ~Rs1.2bn for the pension liabilities and Rs635mn for gratuity liability during the
quarter.

The core operating profits adjusted for trading gains and these expenses has grown by
strong 70.5% yoy and 25.5% qoq.

Higher provisioning dents net profit growth
The credit cost continues to remain higher at 1.1% (annualized) as against 0.5% in FY10.
The higher credit cost has been inline with higher slippages during the quarter. As a result
of higher provisioning the net profit grew by a lower 8.3%yoy. The bank provided
adequately for the slippages during the quarter, as the provision cover remain stable at
70.2% (Including technical write off).

Slippages continue to remain higher
The slippages rate increased substantially during the quarter to 0.61% from 0.33% in
Q2FY11. This includes one big ticket account of Rs~2.0bn which slipped during the quarter.
The slippages have been across segments including Agri and large corporates. The
management expect the slippages to remain at the current level in next quarter as well,
however to start moderating from Q1FY12. The management expects the slippage rate to
halve to 1.1% in FY12 from 2.5% in FY11.


Valuations and view
The stock is currently quoting at 1.9x FY11 and 1.5x FY12 ABV, which looks fair looking at
higher slippages and higher provision costs. We maintain our HOLD rating while cutting our
TP to Rs370 contracting our target P/ABV to 1.7x from 2.0x earlier.