Union Bank of India -Better than peers ::Macquarie Research

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Union Bank of India
Better than peers
Event
 Union Bank (UNBK) reported 4Q11 results that bucked the trend of PSU
banks disappointing on operating metrics. Instead, it surprised positively on
both asset quality and NIMs. We maintain an Outperform rating on UNBK with
a TP of Rs405.

Impact
 Delinquencies reduced sharply. Gross delinquencies declined to 1.23% in
4Q11 from 2.46% in 3Q11 and 3.68% in 1Q11, showing a rapidly improving
trend. The lower delinquencies were helped by significantly reduced slippages
from restructured accounts in the quarter, down to Rs746m from Rs2.2bn last
quarter. Management has automated NPL recognition for a majority of loan
accounts, with a relatively small segment – comprising mainly agri and below
0.5m accounts – left. This should be completed by June 2011. While this has
the potential to generate more NPLs in 1Q12, on a full-year basis we believe
FY12E should be much better than FY11 from a delinquency perspective.
Management is guiding for a 1.25% delinquency rate in FY12 vs 2.44% for
FY11E and our estimate of 1.5%.
 NIMs surprise positively but should compress going forward. UNBK ran
counter to the trend of margin decline for PSU banks. This quarter margins
were flat QoQ at 3.44%, versus our expectation of ~15bp decline. However,
much of the growth this quarter was funded by term deposits, which grew
11% QoQ vs a 4% decline in savings deposits. The growth of these highercost
deposits, combined with the hike in savings rate, is likely to put pressure
on NIMs, which should compress in 1H12. Management is guiding for a 13bp
decline in FY12 NIMs over FY11, but we believe it could be more.
 The bank made total pension and gratuity-related provisions of Rs7.8bn
related to the 2nd option of pension and gratuity. Out of this, Rs3.7bn pertained
to pension option for retirees, which should not be there going forward. The
lower provisions could be a key driver for 40% + earnings growth for UNBK in
FY12E.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs405.00 based on a Gordon Growth methodology.
 Catalyst: Continued improvement in asset quality.
Action and recommendation
 Maintain Outperform. The stock trades at attractive valuations given improving
fundamentals and robust earnings growth. It remains one of our top picks in
the PSU banks space.