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● We recently met the Union Bank of India’s CFO. While the current
quarter’s growth outlook remains muted and slippages are likely to
be high, NIMs are expected to witness an uptick.
● The bank that witnessed a sharp decline in 1Q12 margins (down
34 bps QoQ) expects NIMs to improve by ~10 bp this quarter (to
3.2% levels) aided by the 75 bp base rate hike in July 2011. Credit
growth remains muted this quarter (flat QoQ; ~16% YoY)
● Management expects slippages to be high even in 2Q (~2–2.5%
levels) driven by movement to system NPLs (loans < Rs0.5 mn
are yet to be shifted) and agri. However, slippages in 2H12 are
expected to moderate to 1% levels. As credit costs were high in
2Q11, driven by lower base 2Q12 earnings growth shall be strong.
● Despite the continued asset quality pressures and post the recent
underperformance, valuations are cheap at 1.0 x FY12 book value
(5.4x FY12 earnings), we maintain our OUTPERFORM rating on
the stock.
NIMs likely to improve in 2Q
NIMs witnessed a sharp 34 bp QoQ drop in 1Q12 driven by higher
funding costs (63 bp QoQ rise in cost of funds). However, the bank
raised PLR by 75 bp in July 2011 and reduced the share of bulk
deposits, and expects the margins to improve in the current quarter to
~3.2% (from 3.1% in 1Q11). Management has maintained FY12 NIM
guidance of 3.2%. Loan growth has been muted this quarter (almost
flat QoQ, 16% YoY) and the bank has maintained FY12 guidance of
18% loan growth. Fee income growth is expected to lag credit growth
at ~15% YoY. Tier 1 is currently at 8.8% and the bank is expecting
Rs4 bn capital infusion in 2H FY12.
Slippages to be high even in the current quarter
Gross slippages were a high 2.0% in 1Q12 (2.5% in FY11). As
indicated in the last quarter, management expects NPL slippages to
remain high even in 2Q (loans below Rs0.5 mn are yet to be shifted to
system-based NPLs, and agri loan slippages are expected to be high
in the current quarter). However, the bank expects the slippages to
decline to ~1% levels in 2H FY12. There are no restructurings yet on
the power sector loans, but there is no incremental lending to the
power sector and state electricity boards. Commercial real estate
exposure is relatively low at 1.8% (of loans).
Union Bank’s international operations account for only ~5% of its
balance sheet versus 10–30% for peers; this is a positive for the bank
in the current environment.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● We recently met the Union Bank of India’s CFO. While the current
quarter’s growth outlook remains muted and slippages are likely to
be high, NIMs are expected to witness an uptick.
● The bank that witnessed a sharp decline in 1Q12 margins (down
34 bps QoQ) expects NIMs to improve by ~10 bp this quarter (to
3.2% levels) aided by the 75 bp base rate hike in July 2011. Credit
growth remains muted this quarter (flat QoQ; ~16% YoY)
● Management expects slippages to be high even in 2Q (~2–2.5%
levels) driven by movement to system NPLs (loans < Rs0.5 mn
are yet to be shifted) and agri. However, slippages in 2H12 are
expected to moderate to 1% levels. As credit costs were high in
2Q11, driven by lower base 2Q12 earnings growth shall be strong.
● Despite the continued asset quality pressures and post the recent
underperformance, valuations are cheap at 1.0 x FY12 book value
(5.4x FY12 earnings), we maintain our OUTPERFORM rating on
the stock.
NIMs likely to improve in 2Q
NIMs witnessed a sharp 34 bp QoQ drop in 1Q12 driven by higher
funding costs (63 bp QoQ rise in cost of funds). However, the bank
raised PLR by 75 bp in July 2011 and reduced the share of bulk
deposits, and expects the margins to improve in the current quarter to
~3.2% (from 3.1% in 1Q11). Management has maintained FY12 NIM
guidance of 3.2%. Loan growth has been muted this quarter (almost
flat QoQ, 16% YoY) and the bank has maintained FY12 guidance of
18% loan growth. Fee income growth is expected to lag credit growth
at ~15% YoY. Tier 1 is currently at 8.8% and the bank is expecting
Rs4 bn capital infusion in 2H FY12.
Slippages to be high even in the current quarter
Gross slippages were a high 2.0% in 1Q12 (2.5% in FY11). As
indicated in the last quarter, management expects NPL slippages to
remain high even in 2Q (loans below Rs0.5 mn are yet to be shifted to
system-based NPLs, and agri loan slippages are expected to be high
in the current quarter). However, the bank expects the slippages to
decline to ~1% levels in 2H FY12. There are no restructurings yet on
the power sector loans, but there is no incremental lending to the
power sector and state electricity boards. Commercial real estate
exposure is relatively low at 1.8% (of loans).
Union Bank’s international operations account for only ~5% of its
balance sheet versus 10–30% for peers; this is a positive for the bank
in the current environment.
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