Union Bank of India - A weak quarter; earning pressures should ease in 2H FY12 :: Macquarie Research

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Union Bank of India
A weak quarter; earning pressures
should ease in 2H FY12
Event
 A weak quarter. Union Bank reported 1Q12 PAT of Rs4.6bn, 7% below our
estimate. We expect the earning pressures to ease going into latter part of
FY12. Given the attractive valuations maintain Outperform. We rollover
valuations to FY13 and marginally increase our TP to Rs417 (Rs 405 earlier).
Impact
 Asset quality - automatic NPL recognition continues to take a toll.
Delinquencies were high at Rs7.7bn this quarter (~2% of book annualised).
Two –thirds of it related to automatic recognition of NPLs from less than
Rs0.5m size loan accounts. Management expects to complete the automation
by September of the remaining accounts as well (~5% of loans). We expect
this to keep delinquencies high in 2Q12 as well before easing in 2H12 and are
building in FY12E delinquencies of 1.6%. The bank also did excess NPL
provisioning of Rs1.9bn in line with recent increase in provisioning
requirement by the RBI which pushed up the provisioning cost.
 Margin dip QoQ but loan rate increase should help. NIMs were down
34bp QoQ, largely as a result of ~60bp increase in cost of deposits.
Management has indicated that deposit repricing is putting pressure on
margins. However, much of the deposit repricing may be over by September.
Management is not looking to increase deposit rates since its recent increase
in loan rates by 25bp should support NIMs.
 Moderate loan growth. The loan book declined 5% QoQ much in line with
what we have seen for other banks this quarter. Management is looking for a
moderate and reasonably balanced growth between loans and deposits for
FY12 (~19% for loans and ~17% for deposits).
Earnings and target price revision
 We have moderately cut our earnings for FY12E, 13E and 14E by 3%, 5%
and 5% respectively driven by cut in FY12E loan growth to 18% from 20%
and moderate increase in provisioning.
 Our TP increases marginally to Rs417 from Rs405 earlier as we rollover to
FY13E. The increase in TP is small as we are lowering multiple and
sustainable ROE to factor in higher credit costs.
Price catalyst
 12-month price target: Rs417.00 based on a Gordon Growth methodology.
 Catalyst: Easing of asset quality and NIM pressures in 2H12E.
Action and recommendation
 Earnings growth for FY12 should be robust at ~30% YoY. Given cheap
valuations at 0.9x FY13E, the stock looks attractive. Maintain Outperform.