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Healthy core operating performance; asset quality hiccups persist
Valuations reasonable; risk-reward turning favorable
Stable margins and strong operating leverage will lead to pre provisioning earnings CAGR of 26%
over FY11-13E. Although at the operating level, UNBK’s performance will remain strong, asset quality
issues are likely to persist in the near term, and in turn, keep the provisioning elevated. We estimate
overall PAT CAGR at ~25%. UNBK is trading near its lowest multiple and we believe risk-reward is
favorable.
Slippages to remain elevated in the near term: Over FY10-11, UNBK reported significant stress on
asset quality, led by slippages from restructured portfolio, agriculture loan waiver, and slippages from the
SME and retail segments. We expect the trend to continue in 2QFY12, due to higher system-based NPA
recognition. However, upgrades and recoveries will also pick up in 2HFY12, thereby leading to a fall in
credit cost.
Margins to remain ~3%: In FY10 and FY11, UNBK reported significant margin volatility, led by a build-up
of excess liquidity on the balance sheet. After hitting the bottom in 1QFY10, NIM improved by ~60bp in
FY11 (20bp higher than average NIM over FY05-10). We have modeled ~15bp margin decline in FY12.
Operating leverage to boost profitability: In FY11, UNBK reported ~58% opex growth, led by ~92%
growth in employee expenses. On a higher base, we expect significant operating leverage to play out. We
model in flat opex for FY12, with ~8% decline in employee expenses. Cost-to-core-income ratio would
decline to 42% in FY13 from 51% in FY11.
Fee income growth to gain momentum: UNBK’s fee income (excluding forex) to average assets is
one of the lowest at ~50bp v/s an average of 65bp for peers, indicating significant scope for improvement.
While we model in fee income growth of 15% over FY12-13 on a lower base, a positive surprise is likely.
Valuations reasonable, risk-reward turning favorable: Capital is not likely to be a constraint to
growth, as the government has infused INR6.8b in FY11 and is likely to further infuse INR4b in the current
fiscal. We expect RoA and RoE to be 1.1% and ~22%, respectively in FY12 and FY13. This should help
the bank in funding its future growth plans. While in the near term, asset quality is an overhang, we believe
the risk-reward ratio is favorable. We maintain Buy with a target price of INR360.
Business growth to be in line; margin moderation factored in
We expect UNBK's business growth to be
largely in line with the industry average. We
have modeled in loan growth of 19% and deposit
growth of 17% for FY12.
UNBK's margin performance has been volatile
in FY10 and FY11. The management has
guided ~15bp moderation in NIM (in line with
our estimate) for FY12.
In FY11, UNBK's operating expenses grew
58%, driven by higher employee expenses.
However, we expect operating expenses to
moderate due to lower provisioning towards
employee benefits. The cost-to-average-assets
ratio is likely to be close to its historical average.
Driven by higher operating leverage and lower
incremental credit costs, we expect UNBK to
record 24% earnings CAGR over FY11-13. As
a result, the return ratios are also likely to
improve - RoA of ~1.1% and RoE of ~22%.
1QFY12: Volatility in NIM continues; slippages increase, expect moderation
In 1QFY12, reported margins declined ~35bp
QoQ. However, adjusting for IT refund
(INR640m in 4QFY11), margins declined 25bp
QoQ. While yield on loan increased by 44bp,
250bp decline in CD ratio and 66bp increase in
cost of deposits led to pressure on margins.
We believe that as credit demand picks up, the
pressure on margins would ease, with
improvement in CD ratio.
In 1QFY12, slippages stood at ~INR7.7b v/s
INR4b in 4QFY11. The annualized slippage ratio
for 1QFY12 was 2.05% v/s 1.3% in 4QFY11.
Slippages are likely to remain elevated during
2QFY12, as the bank moves its portfolio to
system-based NPA recognition. However,
higher upgrades and recoveries in 2HFY12
should result in lower net slippages.
Fee income grew 3% YoY to INR2.1b in
1QFY12. The management has guided fee
income growth of 10-15% for FY12.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Healthy core operating performance; asset quality hiccups persist
Valuations reasonable; risk-reward turning favorable
Stable margins and strong operating leverage will lead to pre provisioning earnings CAGR of 26%
over FY11-13E. Although at the operating level, UNBK’s performance will remain strong, asset quality
issues are likely to persist in the near term, and in turn, keep the provisioning elevated. We estimate
overall PAT CAGR at ~25%. UNBK is trading near its lowest multiple and we believe risk-reward is
favorable.
Slippages to remain elevated in the near term: Over FY10-11, UNBK reported significant stress on
asset quality, led by slippages from restructured portfolio, agriculture loan waiver, and slippages from the
SME and retail segments. We expect the trend to continue in 2QFY12, due to higher system-based NPA
recognition. However, upgrades and recoveries will also pick up in 2HFY12, thereby leading to a fall in
credit cost.
Margins to remain ~3%: In FY10 and FY11, UNBK reported significant margin volatility, led by a build-up
of excess liquidity on the balance sheet. After hitting the bottom in 1QFY10, NIM improved by ~60bp in
FY11 (20bp higher than average NIM over FY05-10). We have modeled ~15bp margin decline in FY12.
Operating leverage to boost profitability: In FY11, UNBK reported ~58% opex growth, led by ~92%
growth in employee expenses. On a higher base, we expect significant operating leverage to play out. We
model in flat opex for FY12, with ~8% decline in employee expenses. Cost-to-core-income ratio would
decline to 42% in FY13 from 51% in FY11.
Fee income growth to gain momentum: UNBK’s fee income (excluding forex) to average assets is
one of the lowest at ~50bp v/s an average of 65bp for peers, indicating significant scope for improvement.
While we model in fee income growth of 15% over FY12-13 on a lower base, a positive surprise is likely.
Valuations reasonable, risk-reward turning favorable: Capital is not likely to be a constraint to
growth, as the government has infused INR6.8b in FY11 and is likely to further infuse INR4b in the current
fiscal. We expect RoA and RoE to be 1.1% and ~22%, respectively in FY12 and FY13. This should help
the bank in funding its future growth plans. While in the near term, asset quality is an overhang, we believe
the risk-reward ratio is favorable. We maintain Buy with a target price of INR360.
Business growth to be in line; margin moderation factored in
We expect UNBK's business growth to be
largely in line with the industry average. We
have modeled in loan growth of 19% and deposit
growth of 17% for FY12.
UNBK's margin performance has been volatile
in FY10 and FY11. The management has
guided ~15bp moderation in NIM (in line with
our estimate) for FY12.
In FY11, UNBK's operating expenses grew
58%, driven by higher employee expenses.
However, we expect operating expenses to
moderate due to lower provisioning towards
employee benefits. The cost-to-average-assets
ratio is likely to be close to its historical average.
Driven by higher operating leverage and lower
incremental credit costs, we expect UNBK to
record 24% earnings CAGR over FY11-13. As
a result, the return ratios are also likely to
improve - RoA of ~1.1% and RoE of ~22%.
1QFY12: Volatility in NIM continues; slippages increase, expect moderation
In 1QFY12, reported margins declined ~35bp
QoQ. However, adjusting for IT refund
(INR640m in 4QFY11), margins declined 25bp
QoQ. While yield on loan increased by 44bp,
250bp decline in CD ratio and 66bp increase in
cost of deposits led to pressure on margins.
We believe that as credit demand picks up, the
pressure on margins would ease, with
improvement in CD ratio.
In 1QFY12, slippages stood at ~INR7.7b v/s
INR4b in 4QFY11. The annualized slippage ratio
for 1QFY12 was 2.05% v/s 1.3% in 4QFY11.
Slippages are likely to remain elevated during
2QFY12, as the bank moves its portfolio to
system-based NPA recognition. However,
higher upgrades and recoveries in 2HFY12
should result in lower net slippages.
Fee income grew 3% YoY to INR2.1b in
1QFY12. The management has guided fee
income growth of 10-15% for FY12.
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