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Union Bank's 2QFY12 asset quality disappointed even though operating earnings were largely in
line with our expectations. In 1HFY12, net NPLs increased by Rs11.6bn versus PAT of Rs8.2bn.
Guidance for asset quality has been revised downward. Downgrade to Hold with new TP of
Rs230.
Asset quality disappoints in 2QFY12
Gross delinquencies were about Rs18bn in 2QFY12, or 150bp of loans on a one-year lag basis
(210bp in 1HFY12), which was a negative surprise (see Table 2). Union Bank has transited to
100% system-based NPL recognition as of September 2011 (all accounts except agriculture
portfolio were transited as of June 2011). Management did not quantify the amount of 2Q
slippages due to the transition, but stated that about Rs8bn in delinquencies came from the
agriculture segment (many small accounts), Rs4bn from other government-related schemes and
another Rs2bn from priority sector loans.
Guidance on asset quality revised downwards
Management guides for Rs12bn-14bn gross delinquencies in 2HFY12, but believes the bank’s
focus on recovery will more than offset the incremental delinquencies and thus expects GNPLs to
fall to 2.65% of loans by March 2012 (3.5% as of September 2011). As of June 2011,
management had guided for 2% GNPLs by March 2012. Restructured loans were about 4.5% of
loans as of September 2011.
2QFY12: core earnings in line; provision for bad loans drags down net profit
Net interest margin was 3.21% in 2QFY12 (+11bp qoq), despite some reversal of interest income
on delinquencies during the quarter (unquantifiable). Core fee income continued to post muted
growth (4.2% yoy in 1HFY12). The provision for bad loans increased due to deteriorating asset
quality (about 60bp in 1HFY12; 80bp in FY11).
Downgrade to Hold
The bank earned Rs8.2bn net profit in 1HFY12, but net NPLs increased Rs11.6bn over the same
period, thereby bringing down the adjusted book value between March and September 2011 (see
Chart 2). In our view, given the fragmented nature of delinquencies, a significant recovery from
bad loans will remain an uphill task. We cut our FY12F earnings by 17% and our FY13-14F
earnings by 5%. We now assign a 25% (versus 10% earlier) valuation discount for relatively
higher leverage and the widening gap between BV and adjusted BV. We downgrade to Hold with
a new Rs230 TP (from Rs349.00) as a result of the above.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Union Bank's 2QFY12 asset quality disappointed even though operating earnings were largely in
line with our expectations. In 1HFY12, net NPLs increased by Rs11.6bn versus PAT of Rs8.2bn.
Guidance for asset quality has been revised downward. Downgrade to Hold with new TP of
Rs230.
Asset quality disappoints in 2QFY12
Gross delinquencies were about Rs18bn in 2QFY12, or 150bp of loans on a one-year lag basis
(210bp in 1HFY12), which was a negative surprise (see Table 2). Union Bank has transited to
100% system-based NPL recognition as of September 2011 (all accounts except agriculture
portfolio were transited as of June 2011). Management did not quantify the amount of 2Q
slippages due to the transition, but stated that about Rs8bn in delinquencies came from the
agriculture segment (many small accounts), Rs4bn from other government-related schemes and
another Rs2bn from priority sector loans.
Guidance on asset quality revised downwards
Management guides for Rs12bn-14bn gross delinquencies in 2HFY12, but believes the bank’s
focus on recovery will more than offset the incremental delinquencies and thus expects GNPLs to
fall to 2.65% of loans by March 2012 (3.5% as of September 2011). As of June 2011,
management had guided for 2% GNPLs by March 2012. Restructured loans were about 4.5% of
loans as of September 2011.
2QFY12: core earnings in line; provision for bad loans drags down net profit
Net interest margin was 3.21% in 2QFY12 (+11bp qoq), despite some reversal of interest income
on delinquencies during the quarter (unquantifiable). Core fee income continued to post muted
growth (4.2% yoy in 1HFY12). The provision for bad loans increased due to deteriorating asset
quality (about 60bp in 1HFY12; 80bp in FY11).
Downgrade to Hold
The bank earned Rs8.2bn net profit in 1HFY12, but net NPLs increased Rs11.6bn over the same
period, thereby bringing down the adjusted book value between March and September 2011 (see
Chart 2). In our view, given the fragmented nature of delinquencies, a significant recovery from
bad loans will remain an uphill task. We cut our FY12F earnings by 17% and our FY13-14F
earnings by 5%. We now assign a 25% (versus 10% earlier) valuation discount for relatively
higher leverage and the widening gap between BV and adjusted BV. We downgrade to Hold with
a new Rs230 TP (from Rs349.00) as a result of the above.
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