Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
United Bank of India
(UBOI.BO / UNTDB IN)
INITIATION
Eden of the east
■ Initiate with an OUTPERFORM. We initiate coverage on United Bank of India
(UBI) with an OUTPERFORM and a target price of Rs129 (37% potential upside).
■ Beneficiary of accelerating growth in eastern India. Improving
infrastructure and governance is boosting growth in eastern Indian states
that until now have been relatively less developed. UBI, a governmentowned
bank, has strong presence in eastern India that houses 68% of its
1,568 branches. On the back of this branch network, UBI enjoys a strong
liability franchise and has consistently maintained a 40%-plus share of lowcost
deposits. While its deposit base has been strong, the bank has
operated at relatively low loan-deposit ratios (LDR) that have dampened
ROAs (average RoAs of 0.5% between FY05 and FY10). With economic
growth in the region picking up, we believe the bank is now well positioned
for acceleration in growth.
■ Profitability upswing underway. Over the past year, the LDR for the
bank has risen 700 bp to 69%. This is still the lowest among peers and a
big positive in the current tight liquidity and rising rate environment. As
the bank leverages its asset base better, we expect cost-income ratio to
moderate and fee contribution to rise. Therefore, even building in NIM
moderation akin to other banks in the sector, we forecast operating
profits for the bank to increase at a 45% CAGR over FY11-13. This will
push up RoA to 0.8% by FY12 (from 0.5% in FY10).
■ Cheapest banking franchise. Trading at 0.8x FY12E book and RoE of
18%, UBI is cheap even relative to other state-owned banks. It is also the
cheapest deposit franchise with a market cap-to-CASA ratio of 10%
(market cap-to-deposit: 4%) vs 15-35% for peers. We expect the forecast
upswing in profitability to be a catalyst for rerating, and value UBI at 1.1x
FY12E book (6x EPS), with a target price of Rs129 (37% potential upside).
Eden of the east
Strong franchise in eastern India
Improving infrastructure and governance is boosting growth in eastern Indian states that
until now have been relatively less developed. UBI, a government-owned bank, has strong
presence in eastern India that houses 68% of its 1,568 branches. Barring SBI, there are
virtually no competitors for the bank in eastern India. On back of this branch network, UBI
enjoys a strong liability franchise and has consistently maintained a 40%-plus share of
low-cost deposits (average CASA of 42% over the past six years). The share of savings
deposits (32% of the total deposits) is among the best in the sector even compared to
private sector banks. While its deposit base has been strong, the bank has operated at
relatively low loan-deposit ratios (LDR) that have dampened ROAs (average RoAs of 0.5%
between FY05 and FY10). With economic growth in the region picking up, we believe the
bank is now well positioned for acceleration in growth (historically, eastern India-focused
banks’ profitability has lagged, which we believe will improve).
Profitability upswing underway
Over the past year, the LDR for the bank has risen 700 bp to 69%. This is still the lowest
among peers and a big positive in the current tight liquidity and rising rate environment.
We expect the fee income growth to outpace loan growth aided by the enhanced fee
structures undertaken by the bank (historically, UBI’s fee income was the lowest among
peers – 0.5% of assets due to legacy fee structures). Our forecast FY12 NIMs factor in 20-
30 bp decline from current levels with rising deposit costs. We expect the cost-income
ratio to decline (from 61% in FY10 to 47% in FY12) aided by improving balance sheet
leverage and a higher base effect (the bank has started taking pension provisions from
FY11). Asset quality is broadly in line with peers with 2.9% gross NPL and 71% NPL cover
ratios and is expected to improve further (FY11-12E credit costs of 0.9-0.6%). After the
recent announcement of capital infusion (Rs3.1 bn) by the government of India, UBI’s Tier
1 should reach 9% and suffice the bank’s capital needs over the next year.
On the back of improving cost-income ratio, rising fee income and lower credit costs, we
forecast operating profits for the bank will rise at a 45% CAGR over FY11-13 (even
building in NIM moderation akin to other banks in the sector). This would push up RoA to
0.8% by FY12 (from 0.5% in FY10). Net profit growth should, however, be lower (35%
CAGR over FY11-13) due to lower treasury gains.
Cheapest banking franchise
Trading at 0.8x FY12E book and RoE of 18%, UBI is cheap even relative to other stateowned
banks. It is also the cheapest deposit franchise with a market cap-to-CASA ratio of
10% (market cap-to-deposit ratio of 4%) versus 15-35% for peers. We expect the forecast
upswing in profitability to be a catalyst for rerating, and value UBI at 1.1x FY12E book (6x
EPS), with a target price of Rs129 (37% potential upside). Our target price multiple of 1.1x
is based on the average current price to book for the government banks.
The risks to our call would be savings rate deregulation which would impact UBI higher
than its peers (due to having a higher share of savings deposits). There is also the risk of
UBI’s pension provisions being revised upwards from current estimates.
Profitability upswing underway
Cost-income set to strengthen on improving leverage
With lower margins (leading to lower NII) and fee income, UBI historically had higher costincome
ratios (its cost-to-asset ratio was in line with peers). With better margins, a rising
share of fee income and a higher base in operating costs (for FY11, due to pension
expenses), we expect its cost-income ratio to moderate from 76% in March 2008 to 50%
by March 2012. However, FY12’s cost-income ratio is still higher than peers at 50% (40-
47% for peers).
Around 2,000 employees (its total employee base is 15,285) are expected to retire over
the next two years (replacement costs will be lower, as hiring shall take place at the junior
level). UBI has pension and gratuity provisions outstanding of Rs7.8 bn (over five years;
Rs390 mn per quarter). UBI has already provided Rs1,050 mn for 9M FY11. However, the
estimated pension expense for UBI (at Rs0.4 mn/employee) is much lower compared to its
peers’ (Rs0.9-1.0 mn/employee) which could be due to more conservative/older
assumptions being used by UBI. There is a risk of the pension provision estimate being
revised upwards in the future.
Target price of Rs129 – 37% potential upside
We value UBI at 1.1x FY12 book value (6.0x FY12 earnings) giving a target price of Rs129
(an FY12 RoA of 0.8% and RoE of 18%) and representing potential upside of 37%. We
expect the stock to re-rate to the government bank average P/B of 1.1x. Given the strong
franchise, low LDRs and improving profitability, we believe the current valuations are very
attractive and UBI is one of our preferred picks among mid-cap government banks.
Investment risks
■ Savings rate deregulation: Given the high share of savings deposits (32%), the bank
would be impacted higher than its peers in the event of savings rate deregulation
(daily average savings deposit rate is currently at 3.5% for all the banks).
■ Macro environment: Risks stems from a further worsening of the interest rate
(interest rates were up a sharp 350-400 bp over the past six months) and liquidity
environment impacting bank NIMs, growth and a significant slowdown in the economic
growth impacting asset quality. Higher interest rates could also impact the share of low
cost deposits (with customers moving to term deposits due to the higher differential
versus the savings deposits).
■ Pension provisions: Second pension option provisions for the bank are much lower
at Rs0.43 mn per employee compared to its peers’ Rs0.9-1.0 mn. The estimate could
possibly be revised upwards in the future; this could impact profitability.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
United Bank of India
(UBOI.BO / UNTDB IN)
INITIATION
Eden of the east
■ Initiate with an OUTPERFORM. We initiate coverage on United Bank of India
(UBI) with an OUTPERFORM and a target price of Rs129 (37% potential upside).
■ Beneficiary of accelerating growth in eastern India. Improving
infrastructure and governance is boosting growth in eastern Indian states
that until now have been relatively less developed. UBI, a governmentowned
bank, has strong presence in eastern India that houses 68% of its
1,568 branches. On the back of this branch network, UBI enjoys a strong
liability franchise and has consistently maintained a 40%-plus share of lowcost
deposits. While its deposit base has been strong, the bank has
operated at relatively low loan-deposit ratios (LDR) that have dampened
ROAs (average RoAs of 0.5% between FY05 and FY10). With economic
growth in the region picking up, we believe the bank is now well positioned
for acceleration in growth.
■ Profitability upswing underway. Over the past year, the LDR for the
bank has risen 700 bp to 69%. This is still the lowest among peers and a
big positive in the current tight liquidity and rising rate environment. As
the bank leverages its asset base better, we expect cost-income ratio to
moderate and fee contribution to rise. Therefore, even building in NIM
moderation akin to other banks in the sector, we forecast operating
profits for the bank to increase at a 45% CAGR over FY11-13. This will
push up RoA to 0.8% by FY12 (from 0.5% in FY10).
■ Cheapest banking franchise. Trading at 0.8x FY12E book and RoE of
18%, UBI is cheap even relative to other state-owned banks. It is also the
cheapest deposit franchise with a market cap-to-CASA ratio of 10%
(market cap-to-deposit: 4%) vs 15-35% for peers. We expect the forecast
upswing in profitability to be a catalyst for rerating, and value UBI at 1.1x
FY12E book (6x EPS), with a target price of Rs129 (37% potential upside).
Eden of the east
Strong franchise in eastern India
Improving infrastructure and governance is boosting growth in eastern Indian states that
until now have been relatively less developed. UBI, a government-owned bank, has strong
presence in eastern India that houses 68% of its 1,568 branches. Barring SBI, there are
virtually no competitors for the bank in eastern India. On back of this branch network, UBI
enjoys a strong liability franchise and has consistently maintained a 40%-plus share of
low-cost deposits (average CASA of 42% over the past six years). The share of savings
deposits (32% of the total deposits) is among the best in the sector even compared to
private sector banks. While its deposit base has been strong, the bank has operated at
relatively low loan-deposit ratios (LDR) that have dampened ROAs (average RoAs of 0.5%
between FY05 and FY10). With economic growth in the region picking up, we believe the
bank is now well positioned for acceleration in growth (historically, eastern India-focused
banks’ profitability has lagged, which we believe will improve).
Profitability upswing underway
Over the past year, the LDR for the bank has risen 700 bp to 69%. This is still the lowest
among peers and a big positive in the current tight liquidity and rising rate environment.
We expect the fee income growth to outpace loan growth aided by the enhanced fee
structures undertaken by the bank (historically, UBI’s fee income was the lowest among
peers – 0.5% of assets due to legacy fee structures). Our forecast FY12 NIMs factor in 20-
30 bp decline from current levels with rising deposit costs. We expect the cost-income
ratio to decline (from 61% in FY10 to 47% in FY12) aided by improving balance sheet
leverage and a higher base effect (the bank has started taking pension provisions from
FY11). Asset quality is broadly in line with peers with 2.9% gross NPL and 71% NPL cover
ratios and is expected to improve further (FY11-12E credit costs of 0.9-0.6%). After the
recent announcement of capital infusion (Rs3.1 bn) by the government of India, UBI’s Tier
1 should reach 9% and suffice the bank’s capital needs over the next year.
On the back of improving cost-income ratio, rising fee income and lower credit costs, we
forecast operating profits for the bank will rise at a 45% CAGR over FY11-13 (even
building in NIM moderation akin to other banks in the sector). This would push up RoA to
0.8% by FY12 (from 0.5% in FY10). Net profit growth should, however, be lower (35%
CAGR over FY11-13) due to lower treasury gains.
Cheapest banking franchise
Trading at 0.8x FY12E book and RoE of 18%, UBI is cheap even relative to other stateowned
banks. It is also the cheapest deposit franchise with a market cap-to-CASA ratio of
10% (market cap-to-deposit ratio of 4%) versus 15-35% for peers. We expect the forecast
upswing in profitability to be a catalyst for rerating, and value UBI at 1.1x FY12E book (6x
EPS), with a target price of Rs129 (37% potential upside). Our target price multiple of 1.1x
is based on the average current price to book for the government banks.
The risks to our call would be savings rate deregulation which would impact UBI higher
than its peers (due to having a higher share of savings deposits). There is also the risk of
UBI’s pension provisions being revised upwards from current estimates.
Profitability upswing underway
Cost-income set to strengthen on improving leverage
With lower margins (leading to lower NII) and fee income, UBI historically had higher costincome
ratios (its cost-to-asset ratio was in line with peers). With better margins, a rising
share of fee income and a higher base in operating costs (for FY11, due to pension
expenses), we expect its cost-income ratio to moderate from 76% in March 2008 to 50%
by March 2012. However, FY12’s cost-income ratio is still higher than peers at 50% (40-
47% for peers).
Around 2,000 employees (its total employee base is 15,285) are expected to retire over
the next two years (replacement costs will be lower, as hiring shall take place at the junior
level). UBI has pension and gratuity provisions outstanding of Rs7.8 bn (over five years;
Rs390 mn per quarter). UBI has already provided Rs1,050 mn for 9M FY11. However, the
estimated pension expense for UBI (at Rs0.4 mn/employee) is much lower compared to its
peers’ (Rs0.9-1.0 mn/employee) which could be due to more conservative/older
assumptions being used by UBI. There is a risk of the pension provision estimate being
revised upwards in the future.
Target price of Rs129 – 37% potential upside
We value UBI at 1.1x FY12 book value (6.0x FY12 earnings) giving a target price of Rs129
(an FY12 RoA of 0.8% and RoE of 18%) and representing potential upside of 37%. We
expect the stock to re-rate to the government bank average P/B of 1.1x. Given the strong
franchise, low LDRs and improving profitability, we believe the current valuations are very
attractive and UBI is one of our preferred picks among mid-cap government banks.
Investment risks
■ Savings rate deregulation: Given the high share of savings deposits (32%), the bank
would be impacted higher than its peers in the event of savings rate deregulation
(daily average savings deposit rate is currently at 3.5% for all the banks).
■ Macro environment: Risks stems from a further worsening of the interest rate
(interest rates were up a sharp 350-400 bp over the past six months) and liquidity
environment impacting bank NIMs, growth and a significant slowdown in the economic
growth impacting asset quality. Higher interest rates could also impact the share of low
cost deposits (with customers moving to term deposits due to the higher differential
versus the savings deposits).
■ Pension provisions: Second pension option provisions for the bank are much lower
at Rs0.43 mn per employee compared to its peers’ Rs0.9-1.0 mn. The estimate could
possibly be revised upwards in the future; this could impact profitability.
No comments:
Post a Comment