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Union Bank of India
F2Q12: Asset Quality
Deteriorated
What's Changed
Price Target Rs245.00 to Rs215.00
MW EPS FY 2012-14 From -12%/-11%/-10%
Profits were significantly below estimates. Core
PPOP was in line; the miss was driven by higher
provisions. Asset quality deteriorated sharply with
new impaired loan creation at 7% of loans
(annualized). We reduce earnings/price target to
reflect weak trends.
Impaired (NPLs + restructured) loan creation ratio at
7% of loans (annualized): New NPL creation picked up
to Rs. 18 bn (5% of loans, annualized) from Rs. 8 bn
(2%) in QE Jun-11. In addition, the bank also
restructured Rs. 7.6 bn of loans (2%) – which also
increased from Rs. 2.28 bn (0.6%). Impaired loans ratio
(i.e. outstanding NPLs + restructured as % of loans) now
stands at 8%. Further, NPL coverage ratio (ex tech-write
offs) dropped to 42% from 49% in Jun-11.
System based NPL classification drove part of
deterioration: While management did not explicitly
earmark new NPLs that were created owing to migration
to system based classification, they indicated that
normally they tend to see ~Rs. 6-7 bn of slippages;
hence, it could be inferred that the balance Rs. 12 bn is
on account of system-based classification.
Revenue trends were mixed: The positive in the
results was that NIM was up 11 bps QoQ despite
potential headwinds from interest reversal on NPLs.
However, volumes were weak (deposits -2% QoQ/+10%
YoY) and core fee income grew by only 4% YoY.
Trades at 0.95x F2012 adjusted BV: On a reported
basis, Union Bank trades at 0.8x F2012 BV. However, if
we adjust BV for asset quality and capital (see Exhibit 2
for details) – the stock trades at 0.95x – which we think is
fair given that asset quality stress is likely to continue.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Union Bank of India
F2Q12: Asset Quality
Deteriorated
What's Changed
Price Target Rs245.00 to Rs215.00
MW EPS FY 2012-14 From -12%/-11%/-10%
Profits were significantly below estimates. Core
PPOP was in line; the miss was driven by higher
provisions. Asset quality deteriorated sharply with
new impaired loan creation at 7% of loans
(annualized). We reduce earnings/price target to
reflect weak trends.
Impaired (NPLs + restructured) loan creation ratio at
7% of loans (annualized): New NPL creation picked up
to Rs. 18 bn (5% of loans, annualized) from Rs. 8 bn
(2%) in QE Jun-11. In addition, the bank also
restructured Rs. 7.6 bn of loans (2%) – which also
increased from Rs. 2.28 bn (0.6%). Impaired loans ratio
(i.e. outstanding NPLs + restructured as % of loans) now
stands at 8%. Further, NPL coverage ratio (ex tech-write
offs) dropped to 42% from 49% in Jun-11.
System based NPL classification drove part of
deterioration: While management did not explicitly
earmark new NPLs that were created owing to migration
to system based classification, they indicated that
normally they tend to see ~Rs. 6-7 bn of slippages;
hence, it could be inferred that the balance Rs. 12 bn is
on account of system-based classification.
Revenue trends were mixed: The positive in the
results was that NIM was up 11 bps QoQ despite
potential headwinds from interest reversal on NPLs.
However, volumes were weak (deposits -2% QoQ/+10%
YoY) and core fee income grew by only 4% YoY.
Trades at 0.95x F2012 adjusted BV: On a reported
basis, Union Bank trades at 0.8x F2012 BV. However, if
we adjust BV for asset quality and capital (see Exhibit 2
for details) – the stock trades at 0.95x – which we think is
fair given that asset quality stress is likely to continue.
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