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EARNINGS REVIEW
Union Bank (UNBK.BO)
Neutral Equity Research
Below expectations on asset quality issues, to plague performance
Disappoints with higher NPLs on system-based recognition
2Q net profits of Rs3.5 bn rose 16% yoy, 45% below GSe and 36% below
BB consensus, on higher NPL provisions. Key highlights: (1) UNBK
reported a sharp 37% qoq (46% yoy) increase in gross NPLs to Rs51.4bn as
slippages were high at Rs18.2 bn or 5.9% of lagged loan book and
management indicated that Rs12 bn of this was due to a move to systembased NPL reporting of loans below Rs500,000. Gross NPLs were high at
3.5% and net at 2%. Management guided to bringing gross NPLs down to
2.65% through focus on recoveries, though it appears difficult given that a
large part of slippage was from agri (Rs7bn) and priority sector loans
(Rs5bn). (2) NPL provisions were Rs5bn or 1.4% of loans, with higher
write-offs possible in priority sector loans in subsequent quarters. (3) On
the positive front, NIM expanded 10bps qoq on better asset re-pricing.
Adjusted for last year’s tax refund, NII growth was 18%. Further, there was
a possible interest reversal on high slippages, but for which NII growth
would have been higher. (4) Advances growth at 19% is expected to
moderate to 17%. Deposits growth was 10% yoy but CASA ratio rose
60bps qoq. (5) Tier1 at 8.9% (including profit) could be in stress if
slippages remain high.
Reducing estimates and 12-month target price; retain Neutral
We reduce our earnings estimates significantly for FY12E-FY14E by 21%-
25% to reflect higher NPL provisions and the MTM hit on the investment
book. Consequently, we reduce our GS CAMELOT-based 12-m TP to Rs240
from Rs290 despite rolling forward the target BVPS to Sep 2012, but
remain Neutral. Despite significant stock price correction and low
valuations, we believe the stock is unlikely to outperform until investors
see lower NPL accretion. Risks: higher (lower) NPL formation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
EARNINGS REVIEW
Union Bank (UNBK.BO)
Neutral Equity Research
Below expectations on asset quality issues, to plague performance
Disappoints with higher NPLs on system-based recognition
2Q net profits of Rs3.5 bn rose 16% yoy, 45% below GSe and 36% below
BB consensus, on higher NPL provisions. Key highlights: (1) UNBK
reported a sharp 37% qoq (46% yoy) increase in gross NPLs to Rs51.4bn as
slippages were high at Rs18.2 bn or 5.9% of lagged loan book and
management indicated that Rs12 bn of this was due to a move to systembased NPL reporting of loans below Rs500,000. Gross NPLs were high at
3.5% and net at 2%. Management guided to bringing gross NPLs down to
2.65% through focus on recoveries, though it appears difficult given that a
large part of slippage was from agri (Rs7bn) and priority sector loans
(Rs5bn). (2) NPL provisions were Rs5bn or 1.4% of loans, with higher
write-offs possible in priority sector loans in subsequent quarters. (3) On
the positive front, NIM expanded 10bps qoq on better asset re-pricing.
Adjusted for last year’s tax refund, NII growth was 18%. Further, there was
a possible interest reversal on high slippages, but for which NII growth
would have been higher. (4) Advances growth at 19% is expected to
moderate to 17%. Deposits growth was 10% yoy but CASA ratio rose
60bps qoq. (5) Tier1 at 8.9% (including profit) could be in stress if
slippages remain high.
Reducing estimates and 12-month target price; retain Neutral
We reduce our earnings estimates significantly for FY12E-FY14E by 21%-
25% to reflect higher NPL provisions and the MTM hit on the investment
book. Consequently, we reduce our GS CAMELOT-based 12-m TP to Rs240
from Rs290 despite rolling forward the target BVPS to Sep 2012, but
remain Neutral. Despite significant stock price correction and low
valuations, we believe the stock is unlikely to outperform until investors
see lower NPL accretion. Risks: higher (lower) NPL formation.
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