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In 4QFY11, Union Bank surprised with a stable margin qoq and a decline in slippages. However,
the sharp increase in staff costs was a dampener. We factor in the equity dilution and cut our
estimates for FY12-13 on the back of higher normalised operating costs in FY11. Buy, due to
undemanding valuations.
4QFY11: stable NIMs and decline in slippages qoq
Net interest margin (NIM) remained stable qoq (+5bps yoy) at 3.44% in 4QFY11. Further,
slippages fell qoq to 30bp of loans on a one-year lag basis (60bps in 1QFY11, 120bps in 2QFY11
and 70bps in 3QFY11). Core fee income, however, grew a muted 4% yoy in FY11. Treasury
gains were 24% of PBT in 4QFY11 (17.7% in FY11 vs 20.2% in FY10).
Staff cost has surprised in FY11
Staff costs increased 92% yoy to Rs26bn in FY11. The second pension option liability is
Rs20.7bn, Rs3.8bn of which pertains to retired employees and was charged off in FY11. Of the
remaining Rs16.9bn, pertaining to existing employees, the bank provided Rs3.4bn (one-fifth) in
FY11. The gratuity liability was Rs3.3bn, of which Rs0.7bn (one-fifth) was provisioned for in
FY11. Adjusting for one-time second-pension provision costs, normalised staff costs have spiked
up yoy, partly on account of catch-up provisions made for wage revisions. Adjusting for the onetime
expenses in FY11, we build in 2.4% yoy increase in operating expenses in FY12F.
Asset quality
Slippages increased to 220bps of average loans in FY11 vs 170bps in FY10. This was partly due
to one-offs and implementation of technology-based NPL recognition. Going forward,
management guides for stable asset quality and expects slippages to fall to 125bps in FY12.
Cut in estimates for FY12-13; maintain Buy
We have cut our earnings estimates for FY12-13 by about 10%, largely on the back of higherthan-
expected normalised operating costs in FY11. Further, the equity dilution in 4QFY11 has
pulled down our EPS forecasts for the period. We maintain Buy but cut our target price to Rs370,
due to the combination of a cut in our estimates and the inclusion of FY14 forecasts, which has
lowered average RoE over FY12-14F. At our target price, the stock would trade at 1.7x FY12F
adjusted book value and 6x EPS.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
In 4QFY11, Union Bank surprised with a stable margin qoq and a decline in slippages. However,
the sharp increase in staff costs was a dampener. We factor in the equity dilution and cut our
estimates for FY12-13 on the back of higher normalised operating costs in FY11. Buy, due to
undemanding valuations.
4QFY11: stable NIMs and decline in slippages qoq
Net interest margin (NIM) remained stable qoq (+5bps yoy) at 3.44% in 4QFY11. Further,
slippages fell qoq to 30bp of loans on a one-year lag basis (60bps in 1QFY11, 120bps in 2QFY11
and 70bps in 3QFY11). Core fee income, however, grew a muted 4% yoy in FY11. Treasury
gains were 24% of PBT in 4QFY11 (17.7% in FY11 vs 20.2% in FY10).
Staff cost has surprised in FY11
Staff costs increased 92% yoy to Rs26bn in FY11. The second pension option liability is
Rs20.7bn, Rs3.8bn of which pertains to retired employees and was charged off in FY11. Of the
remaining Rs16.9bn, pertaining to existing employees, the bank provided Rs3.4bn (one-fifth) in
FY11. The gratuity liability was Rs3.3bn, of which Rs0.7bn (one-fifth) was provisioned for in
FY11. Adjusting for one-time second-pension provision costs, normalised staff costs have spiked
up yoy, partly on account of catch-up provisions made for wage revisions. Adjusting for the onetime
expenses in FY11, we build in 2.4% yoy increase in operating expenses in FY12F.
Asset quality
Slippages increased to 220bps of average loans in FY11 vs 170bps in FY10. This was partly due
to one-offs and implementation of technology-based NPL recognition. Going forward,
management guides for stable asset quality and expects slippages to fall to 125bps in FY12.
Cut in estimates for FY12-13; maintain Buy
We have cut our earnings estimates for FY12-13 by about 10%, largely on the back of higherthan-
expected normalised operating costs in FY11. Further, the equity dilution in 4QFY11 has
pulled down our EPS forecasts for the period. We maintain Buy but cut our target price to Rs370,
due to the combination of a cut in our estimates and the inclusion of FY14 forecasts, which has
lowered average RoE over FY12-14F. At our target price, the stock would trade at 1.7x FY12F
adjusted book value and 6x EPS.
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