United Bank of India: Upgrade to BUY with strong conviction: Emkay

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United Bank of India

Reaping benefits of improving efficiencies

BUY

CMP: Rs 95                                       Target Price: Rs 130

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n     UNTDB’s Q3FY11 NII at Rs5.6bn and net profit at Rs1.6bn much ahead of our estimates. Robust NII driven by improved yields (up 32bps qoq) and improving CDR (up 230bps qoq)

n     Fee income continues to be strong from repricing of products; expansion of reach. The other income excl treasury up 41% yoy

n     The slippages have surprised positively at Rs2bn, flat qoq. PCR at 71.2% as per RBI norm. Provided at 100%+ for the net incremental slippages for M9FY11

n     The turnaround story panning out exactly as estimated.  Valns near stress case of 10% discount to book, absolutely unwarranted. Upgrade to BUY with strong conviction

NII growth much ahead of estimates…

UNTDB’s NII for Q3FY11 grew by 6.4% qoq to Rs5.6bn, much ahead of our estimates

of Rs5.2bn. The NII growth was driven by 32bps expansion in yield on advances and

230bps qoq expansion in CDR.

…As continues to reap benefits of improving efficiencies

The NIMs expanded by ~16bps qoq driven by (1) a 230bps qoq expansion in CDR to

69.3% and (2) expansion of 32bps qoq in yield on advances. Together they helped in

more than fully mitigating 22bps rise in cost of funds. We believe that further possible

expansion in CDR and improving yields will help the NIMs sustain at current levels.

Advances growth remains strong qoq

The advances growth remained strong at 9.5% qoq. The sequential growth was strong

across all segments. However, we reckon of the fact that the proportion of SME loans has

reached an appropriate level of 14.6%.

CASA improves commendably despite strong growth
The CASA profile improved sequentially by 55bps to 40.2% despite healthy growth in
advances. In fact, the current as well as savings deposits have grown by strong 11.7% and
6.2% qoq.

Repricing of products, expanding network help fee income
The other income excluding trading gains has grown by 41% yoy and 5.1% qoq. The
repricing of products effective May 2010 and expanding the third party product sales to
more branches has helped UNTDB to report robust growth in fee income. The other income
was also aided by higher recoveries.

Core profits more than double yoy; cost efficiencies playing out
The core operating profit for the quarter has more than doubled over last year as the cost
efficiencies have played out. The cost/income ratio has come down dramatically to 45.2%
for Q3FY11 from 56.8% in Q3FY10 driven by robust growth in all income streams

Provisions remain high for pension and restructured assets
UNTDB has crystalised its pension liabilities at ~Rs7.4bn and is thereby amortising
Rs350mn/quarter for the same. UNTDB has also started providing Rs145mn for Q3FY11
(total Rs580mn over four quarters) for its losses on restructuring one of the assets (total
exposure Rs3.2bn including term loans of Rs2bn).
Slippages surprise positively
The slippages continued to stabilize as they were at Rs2.0bn for the quarter compared with
Rs2.5bn in Q1FY11 and Rs2bn in Q2FY11. As the bank has provided aggressively (at
100%+) for the net incremental slippages for M9FY11, the net NPAs have come down to
1.5% for Q3FY11. In terms of RBI norms, the provision cover stood at 71.2%.

Capital adequacy remains comfortable
UNTDB’s CAR remained comfortable at 12.5% with tier I CAR of 8.2% (excluding M9FY11
profits). UNTDB has headroom for raising innovative perpetual debt capital from the
government. In terms of preference share capital UNTDB has almost exhausted its limits.
Valuations and view
Our thesis for initiating coverage on UNTDB has perfectly played out in its recent financial
performance which is (1) expansion in NIM due to improving CDR and yields (2) improving
cost ratios as revenue streams grow faster than expenses and (3) stable to lower NPAs
driven by lower slippages and higher provisions.
At the CMP, the stock is quoting at 1.1x FY11E and 0.9x FY12E ABV. We believe that the
stock is undeservingly quoting at stress case valuations when the performance is indicating
the other way. We upgrade the stock to BUY with target price of Rs130. The change in
price target is only to take into account the derating of all the bank stocks in recent times.