Union Bank of India- Consistently has disappointed ::Macquarie Research,

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Union Bank of India
Consistently has disappointed
Event
 Downgrading to Neutral: We cut our earnings estimates and TP sharply and
downgrade Union Bank to Neutral from Outperform. Our TP is now Rs260.
Impact
 Consistently has disappointed on asset quality: Union Bank has
disappointed time and again on asset quality, with slippages being much
higher than expected. We don’t think slippages are going to abate over the
long term. There could be lower slippages in 2H FY12; however, we think
FY13 numbers are going to look bad too. We estimate that stressed assets
will increase from 58% of net-worth in FY11 to 100% by FY13. We factor in a
25bps YoY increase in credit costs to 95bps in FY13E.
 Management change in April 2012: The current CMD, Mr. Nair, is expected
to superannuate/retire in April 2012. Management changes in PSU banks
have caused a lot of uncertainty, as reflected by past experiences.
 Deposit franchise remains weak: Despite all the aggressive re-branding
and investments in technology, Union Bank’s CASA has remained weak at
30-31% levels and has failed to show any improvement over the past few
years.
 Fee income momentum disappointing: Fees as a proportion of assets have
been consistently declining from 28bps in FY04 to 17bps in FY11. What
surprises us is that, despite having heavily invested in technology, re-branding
and infrastructure/systems, Union Bank has failed to deliver on the noninterest
income front.
 Will take management guidance with a pinch of salt: We recommend that
investors not get carried away with management guidance in general, as it
has consistently disappointed, and management has shown a tendency to
revise guidance mostly downward every quarter.
Earnings and target price revision
 We cut our earnings by 17% for FY13E and by 21% for FY14E, mainly due to
higher credit costs. We cut our TP by 38% to Rs260 mainly as a result of
reducing our target multiple from 1.4x to 0.9x. The reduction is due to a lower
ROE and lower projected earnings growth.
Price catalyst
 12-month price target: Rs260.00 based on a Gordon Growth methodology.
 Catalyst: Pressure on asset quality – increase in NPLs and restructured
assets.
Action and recommendation
 Downgrade to Neutral: We downgrade Union Bank to Neutral with a revised
TP of Rs260.

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