Union Bank of India — Downgrade to U/P on near term headwinds

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Union Bank of India — Downgrade to U/P on
near term headwinds
Country Overview
Cut UBI to Underperform and PO to Rs295
We are downgrading UBI to Underperform (from Neutral) owing to near term
asset quality headwinds. We est. slippages to be at
Rs30bn in FY11), with the majority of these to be front loaded. Further, margins to
be also lower than est. resulting in weak 1QFY12 earnings. We cut FY12/13
earnings by ~4/6% to capture higher provisions and lower margins. Hence, PO
cut to Rs295 as stock unlikely to re-rate (beyond 1.4x; ROE <19%) till headwinds
subside.
NPL slippages may rise sharply qoq; 1QFY12 earnings flat
We think slippages during the 1QFY12 may see a very sharp rise (+50% qoq)
owing to a few large a/cs becoming NPL’s and due to shift of the smaller loans to
the on-line NPL recognition system. Moreover, with margins also likely to be
down qoq, we reckon 1QFY12 earnings may be flat yoy.
Earnings growth at +21/24% for FY12/13, but off a low base
While UBI’s earnings growth to be at +20% for FY12, it is off a low base (flat yoy
in FY11). While we est. loan growth of +20%, margins are to remain under
pressure (est. ~20bps yoy decline). Growth driven by low opex growth. Credit
costs at ~80bps. We prefer PNB or smaller govt. banks (OBC/ Indian Bank) that
offer a better risk return.