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Union Bank of India (UNBK.BO): Downgrade to Sell on asset quality
Source of opportunity
We downgrade Union Bank of India from Neutral to Sell on the back of
weaker fundamentals than peers — such as its higher slippage ratio
(5.8%; or about 2% adjusted for one-off items vs. 3.1% for PSU peers);
lower Tier 1 ratio of 8.7% (vs. 9.1% for peers); and lower coverage ratio
of 42% (vs. 52% for peers). Furthermore, we expect lower loan growth
and margin pressure as with other banks due to slower economic
growth and our expectations for interest rate cuts. The bank has seen its
RoA fall to 0.6% in 2QFY12, which is the lowest among banks under our
coverage and which we expect to remain low at around 0.7% between
FY12-FY14E.
Catalyst
We reduce our earnings estimates for FY12E/FY13E/FY14E by
1.3%/6.7%/4.1% as we lower our loan-growth assumptions by 6% over
FY12-14E both and increase provisioning expenses. We believe that
asset quality issues and its lower Tier 1 ratio will hinder loan growth and
we expect the bank to lose market share in advances.
Valuation
Union Bank has been a significant underperformer relative to the
benchmark index, falling 14%in the last 3 months and down 34% over
the last 12 months due to concerns over higher slippages, and
disappointment on management not delivering on guidance. The stock
currently trades at a low 0.72X 12-m fwd P/B but we believe it could derate
further and continue to underperform on its poor fundamentals.
Based on our Camelot based valuation methodology, we value the stock
at 1X 12-month fwd book adjusted (for 100% net NPL write off and 15%
provision on restructured assets) versus ROA of 0.7%.
Key risks
Upside risk: Sharp and aggressive rate cuts by the RBI would undercut
NPL concerns and could benefit NIMs from 3QFY13.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Sell list
Coverage View: Neutral
Sector report
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Union Bank of India (UNBK.BO): Downgrade to Sell on asset quality
Source of opportunity
We downgrade Union Bank of India from Neutral to Sell on the back of
weaker fundamentals than peers — such as its higher slippage ratio
(5.8%; or about 2% adjusted for one-off items vs. 3.1% for PSU peers);
lower Tier 1 ratio of 8.7% (vs. 9.1% for peers); and lower coverage ratio
of 42% (vs. 52% for peers). Furthermore, we expect lower loan growth
and margin pressure as with other banks due to slower economic
growth and our expectations for interest rate cuts. The bank has seen its
RoA fall to 0.6% in 2QFY12, which is the lowest among banks under our
coverage and which we expect to remain low at around 0.7% between
FY12-FY14E.
Catalyst
We reduce our earnings estimates for FY12E/FY13E/FY14E by
1.3%/6.7%/4.1% as we lower our loan-growth assumptions by 6% over
FY12-14E both and increase provisioning expenses. We believe that
asset quality issues and its lower Tier 1 ratio will hinder loan growth and
we expect the bank to lose market share in advances.
Valuation
Union Bank has been a significant underperformer relative to the
benchmark index, falling 14%in the last 3 months and down 34% over
the last 12 months due to concerns over higher slippages, and
disappointment on management not delivering on guidance. The stock
currently trades at a low 0.72X 12-m fwd P/B but we believe it could derate
further and continue to underperform on its poor fundamentals.
Based on our Camelot based valuation methodology, we value the stock
at 1X 12-month fwd book adjusted (for 100% net NPL write off and 15%
provision on restructured assets) versus ROA of 0.7%.
Key risks
Upside risk: Sharp and aggressive rate cuts by the RBI would undercut
NPL concerns and could benefit NIMs from 3QFY13.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Sell list
Coverage View: Neutral
Sector report
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