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Union Bank of India – Profitability under pressure’
UBI’s FY11 business growth would be marginally lower than
guidance. Our recent meeting with the management indicates
that CASA is likely to come-off in the near-term. In an effort to
retain CASA, the bank plans to accelerate the pace of branch
additions. NIM, after correcting sharply in Q4 FY11, is expected
to average near 3.1% in FY12. No across-the-board deposit rate
hike is planned in the immediate future. Bank expects pension
provisioning to increase in Q4 FY11 as many employees are
retiring in the current year.
In FY12, UBI targets a strong 25% credit growth with retail
loans expected to outgrow. NPLs have peaked-out and the credit
cost is estimated to fall significantly. Government’s proposed
infusion of ~Rs11bn equity capital would provide a much needed
boost to the bank’s capital adequacy. We believe UBI’s RoA and
RoE would slip significantly in FY11 and are unlikely to recover
in FY12 and FY13. We downgrade bank’s rating from BUY to MP
and reduce our 9-month target by 12% to Rs344.
Loan growth for FY11 could be marginally below guidance
UBI expects credit growth could marginally fall short of the guided
25% in the current year. It is now expected at 23-24%. Given that
bank’s credit has expanded by modest 12% (against 16% for the
system) in the first nine months, even the latest expectation for fullyear
loan growth requires UBI to grow its book by a challenging 10-
11% qoq in Q4 FY11. As per the bank, typically 40% of the business
comes in the last quarter of the year. For FY12, bank expects credit
growth at 25%. Retail loans (currently 11% of advances) are expected
to growth ahead of the overall book at ~30% while MSME loans
(currently 18% of advances) are likely to grow at 20-25%.
Deposit growth to be lower than targeted 20%
The deposit growth target of 20% for FY11 is unlikely to be achieved.
UBI is in a comfortable liquidity situation currently being a net lender
in the system. The C/D ratio of the bank at 72% is materially lower as
compared to most of the large-sized and mid-sized PSBs. For achieving
the targeted growth, the bank would need to mobilize deposits at
higher rates which is unwarranted as the credit growth could be met
from the current liquidity. UBI expects system liquidity to get tighter in
the near-term on account of advance tax outflows.
CASA ratio on decline; aggressive branch addition to continue
With significant increase in term deposits (TD) rates, UBI has been
witnessing migration from CASA deposits. Bank expects its CASA ratio
to decline by more than 1% in Q4 FY11 from 33.3% at the end of Q3
FY11. To retain CASA, the bank would be more aggressively focusing
on branch additions. In the past 12 months, UBI has added about 275
branches and 300 ATMs. In FY12, bank plans to add 300-350
branches. The bank is keen on opening new branches in locations that
have retail deposit franchise and retail lending appetite enabling the
branch to turnaround within 12-18 months.
Bulk deposits form 20-22% of deposits; ~70% of advances at
floating rate
Within the term deposits, 20-22% are bulk deposits which are more
than Rs50mn in size having an average duration of 6 months. Amongst
non-bulk deposits, the average duration has been declining as
depositors are parking money in shorter-term deposits with
expectations of further increase in interest rates.
About 40% of the bank’s loan book is corporate loans within which the
ratio of working capital loans (duration less than 1 year) and term
loans (duration in the range of 7-10 years) is 50:50. Most of the MSME
advances are working capital loans. Within retail loans, 70% is housing
loans (duration ~10 year) and 11-12% each is vehicle loans and
education loans. As per the bank, 70% of the loan book is at floating
rate – 20% linked to the Base Rate and 50% linked to BPLR.
NIM to correct by 15-20bps in Q4 FY11; seen at 3.1% in FY12
UBI expects NIM, currently at multi-quarter high of 3.4%, to correct by
15-20bps in Q4 FY11 and then remain stable in Q1 FY12. The recent
deposit rate hikes are likely to increase CoD by 20-25bps in Q4 FY11.
For the full-year FY12, the bank sees margin at 3.1%. Bank does not
plan to implement an across-the-board deposit rate hike in the nearterm.
However, it intends to mobilize some big-ticket deposits by
offering higher rates. As per the bank, any across-the-board deposit
rate hike would be followed by BPLR and Base Rate increase.
Provisioning for pension may increase substantially in Q4 FY11
As per the bank, the 2nd pension liability has been estimated at Rs24bn
which has to be amortized over five years. For retiring employees, the
full liability has to be provided in the year of retirement. The bank may
see higher pension provisioning in Q4 FY11 as significant number of
employees are retiring in the current year. Of the estimated annual
provisioning of Rs2.5bn towards gratuity, the bank has already
provided Rs1.8bn in 9m FY11.
NPLs have peaked-out; credit cost to fall significantly in FY12
UBI had witnessed significant deterioration in asset quality in Q2 FY11
with GNPL% increasing from 2.2% to 2.8% qoq. This was mainly
driven by few large accounts under the agriculture debt waiver scheme
turning into NPL. In Q3 FY11, there was improvement in GNPL level to
2.7% partly aided by strong loan book expansion. Additions to GNPL
were significantly lower qoq while recovery and upgradation was
substantial. UBI expects GNPL% to further improve to 2.5% in Q4
FY11 and 2.2% in FY12 despite continuing slippages from the
restructured book (~4% of advances). The credit cost (provisioning
charge) is expected to fall drastically from 1.2% in 9m FY11 to 0.6% in
FY12. PCR stood at 70% at the end of Q3 FY11.
~Rs11bn capital infusion by Government to provide a much
needed boost to capital adequacy
At the end of Q3 FY11, UBI CAR and Tier-1 capital stood at 13% and
8.6% respectively. After considering for some time, the Government
has finally decided to infuse ~Rs11bn equity capital in UBI under the
re-capitalisation package. Post this Government’s holding in the bank
would increase to 58.2% from present 55.4%. In our model we have
assumed the preferential equity issuance at Rs335 thereby implying a
6.5% dilution for the bank. In the longer term, UBI intends to utilize
the material headroom for raising Tier-2 capital for supporting
business growth.
Profitability under pressure; RoA and RoE to slip materially
UBI profitability and return ratios have been under significant stress
due to substantial rise in NPLs. Though the credit cost would materially
come-off in the coming quarters, the absolute loan loss provisioning
could stabilize around Q3 FY11 levels (Rs3.6bn). We expect the bank’s
RoA to decline by ~20bps in FY11 to 1% as against management
guidance of sustaining it. RoE is expected to decline significantly from
26% in FY10 to 22% in FY11. The return ratios are unlikely to improve
in FY12 with estimated marginal correction in NIM and slight slippage
in C/I ratio. Over FY10-13, we expect UBI to report a modest 17% PAT
CAGR on a strong NII CAGR of 28%.
Downgrade UBI from BUY to Market Performer; Reduce 9-
month target to Rs344
In the past five months, UBI has underperformed the Bankex by 5%
due to increased NPL risk. The bank’s valuation though is cheaper at
1.1x FY13 P/adj.BV than the average 1.4x of peers, the stock is
unlikely to witness any material re-rating in the near term. The key
risk to our view would be a stellar Q4 FY12 performance; especially
more-than-expected improvement in asset quality. Using our
proprietary valuation model for banks, Bank 20, and an adjudged
discount, we assign FY13 P/adj.BV multiple of 1.1x to UBI and arrive at
9-month price target of Rs344. Downgrade to MP with the target price
lowered by 12%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Union Bank of India – Profitability under pressure’
UBI’s FY11 business growth would be marginally lower than
guidance. Our recent meeting with the management indicates
that CASA is likely to come-off in the near-term. In an effort to
retain CASA, the bank plans to accelerate the pace of branch
additions. NIM, after correcting sharply in Q4 FY11, is expected
to average near 3.1% in FY12. No across-the-board deposit rate
hike is planned in the immediate future. Bank expects pension
provisioning to increase in Q4 FY11 as many employees are
retiring in the current year.
In FY12, UBI targets a strong 25% credit growth with retail
loans expected to outgrow. NPLs have peaked-out and the credit
cost is estimated to fall significantly. Government’s proposed
infusion of ~Rs11bn equity capital would provide a much needed
boost to the bank’s capital adequacy. We believe UBI’s RoA and
RoE would slip significantly in FY11 and are unlikely to recover
in FY12 and FY13. We downgrade bank’s rating from BUY to MP
and reduce our 9-month target by 12% to Rs344.
Loan growth for FY11 could be marginally below guidance
UBI expects credit growth could marginally fall short of the guided
25% in the current year. It is now expected at 23-24%. Given that
bank’s credit has expanded by modest 12% (against 16% for the
system) in the first nine months, even the latest expectation for fullyear
loan growth requires UBI to grow its book by a challenging 10-
11% qoq in Q4 FY11. As per the bank, typically 40% of the business
comes in the last quarter of the year. For FY12, bank expects credit
growth at 25%. Retail loans (currently 11% of advances) are expected
to growth ahead of the overall book at ~30% while MSME loans
(currently 18% of advances) are likely to grow at 20-25%.
Deposit growth to be lower than targeted 20%
The deposit growth target of 20% for FY11 is unlikely to be achieved.
UBI is in a comfortable liquidity situation currently being a net lender
in the system. The C/D ratio of the bank at 72% is materially lower as
compared to most of the large-sized and mid-sized PSBs. For achieving
the targeted growth, the bank would need to mobilize deposits at
higher rates which is unwarranted as the credit growth could be met
from the current liquidity. UBI expects system liquidity to get tighter in
the near-term on account of advance tax outflows.
CASA ratio on decline; aggressive branch addition to continue
With significant increase in term deposits (TD) rates, UBI has been
witnessing migration from CASA deposits. Bank expects its CASA ratio
to decline by more than 1% in Q4 FY11 from 33.3% at the end of Q3
FY11. To retain CASA, the bank would be more aggressively focusing
on branch additions. In the past 12 months, UBI has added about 275
branches and 300 ATMs. In FY12, bank plans to add 300-350
branches. The bank is keen on opening new branches in locations that
have retail deposit franchise and retail lending appetite enabling the
branch to turnaround within 12-18 months.
Bulk deposits form 20-22% of deposits; ~70% of advances at
floating rate
Within the term deposits, 20-22% are bulk deposits which are more
than Rs50mn in size having an average duration of 6 months. Amongst
non-bulk deposits, the average duration has been declining as
depositors are parking money in shorter-term deposits with
expectations of further increase in interest rates.
About 40% of the bank’s loan book is corporate loans within which the
ratio of working capital loans (duration less than 1 year) and term
loans (duration in the range of 7-10 years) is 50:50. Most of the MSME
advances are working capital loans. Within retail loans, 70% is housing
loans (duration ~10 year) and 11-12% each is vehicle loans and
education loans. As per the bank, 70% of the loan book is at floating
rate – 20% linked to the Base Rate and 50% linked to BPLR.
NIM to correct by 15-20bps in Q4 FY11; seen at 3.1% in FY12
UBI expects NIM, currently at multi-quarter high of 3.4%, to correct by
15-20bps in Q4 FY11 and then remain stable in Q1 FY12. The recent
deposit rate hikes are likely to increase CoD by 20-25bps in Q4 FY11.
For the full-year FY12, the bank sees margin at 3.1%. Bank does not
plan to implement an across-the-board deposit rate hike in the nearterm.
However, it intends to mobilize some big-ticket deposits by
offering higher rates. As per the bank, any across-the-board deposit
rate hike would be followed by BPLR and Base Rate increase.
Provisioning for pension may increase substantially in Q4 FY11
As per the bank, the 2nd pension liability has been estimated at Rs24bn
which has to be amortized over five years. For retiring employees, the
full liability has to be provided in the year of retirement. The bank may
see higher pension provisioning in Q4 FY11 as significant number of
employees are retiring in the current year. Of the estimated annual
provisioning of Rs2.5bn towards gratuity, the bank has already
provided Rs1.8bn in 9m FY11.
NPLs have peaked-out; credit cost to fall significantly in FY12
UBI had witnessed significant deterioration in asset quality in Q2 FY11
with GNPL% increasing from 2.2% to 2.8% qoq. This was mainly
driven by few large accounts under the agriculture debt waiver scheme
turning into NPL. In Q3 FY11, there was improvement in GNPL level to
2.7% partly aided by strong loan book expansion. Additions to GNPL
were significantly lower qoq while recovery and upgradation was
substantial. UBI expects GNPL% to further improve to 2.5% in Q4
FY11 and 2.2% in FY12 despite continuing slippages from the
restructured book (~4% of advances). The credit cost (provisioning
charge) is expected to fall drastically from 1.2% in 9m FY11 to 0.6% in
FY12. PCR stood at 70% at the end of Q3 FY11.
~Rs11bn capital infusion by Government to provide a much
needed boost to capital adequacy
At the end of Q3 FY11, UBI CAR and Tier-1 capital stood at 13% and
8.6% respectively. After considering for some time, the Government
has finally decided to infuse ~Rs11bn equity capital in UBI under the
re-capitalisation package. Post this Government’s holding in the bank
would increase to 58.2% from present 55.4%. In our model we have
assumed the preferential equity issuance at Rs335 thereby implying a
6.5% dilution for the bank. In the longer term, UBI intends to utilize
the material headroom for raising Tier-2 capital for supporting
business growth.
Profitability under pressure; RoA and RoE to slip materially
UBI profitability and return ratios have been under significant stress
due to substantial rise in NPLs. Though the credit cost would materially
come-off in the coming quarters, the absolute loan loss provisioning
could stabilize around Q3 FY11 levels (Rs3.6bn). We expect the bank’s
RoA to decline by ~20bps in FY11 to 1% as against management
guidance of sustaining it. RoE is expected to decline significantly from
26% in FY10 to 22% in FY11. The return ratios are unlikely to improve
in FY12 with estimated marginal correction in NIM and slight slippage
in C/I ratio. Over FY10-13, we expect UBI to report a modest 17% PAT
CAGR on a strong NII CAGR of 28%.
Downgrade UBI from BUY to Market Performer; Reduce 9-
month target to Rs344
In the past five months, UBI has underperformed the Bankex by 5%
due to increased NPL risk. The bank’s valuation though is cheaper at
1.1x FY13 P/adj.BV than the average 1.4x of peers, the stock is
unlikely to witness any material re-rating in the near term. The key
risk to our view would be a stellar Q4 FY12 performance; especially
more-than-expected improvement in asset quality. Using our
proprietary valuation model for banks, Bank 20, and an adjudged
discount, we assign FY13 P/adj.BV multiple of 1.1x to UBI and arrive at
9-month price target of Rs344. Downgrade to MP with the target price
lowered by 12%.
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