Union Bank of India, Q2FY13 Result Update:: Centrum

Sustainability is the key
UBI’s Q2FY13 core as well as bottomline performance was in line with our
expectations. Asset quality surprised positively with %GNPA improving by
10bps QoQ helped by lower slippage rate (1.8%) and healthy recoveries.
Importantly, the sustainability of asset quality improvement is questionable
on account of the chunky nature of recoveries and persistent risk of slippages
over next few quarters. We rate UBI Neutral led by limited upside (3%).
Asset quality improves, but sustainability required: Unlike most peers, UBI
reported an improvement in its asset quality matrix during the quarter with
GNPA improving by 10bps QoQ to 3.7%. Dissecting further, the improvement
in GNPA was led by lower slippages (1.8% vs 3.6% in previous quarter) as well
as uptick in recoveries. It should be noted that the recoveries are chunky in
nature and hence sustainability is questionable. Incremental restructuring was
contained at Rs8.4bn with cumulative pool now at 8.3% (5.8% on net o/s
basis). While the asset quality matrix improved during the quarter,
sustainability of the trend going forward is crucial.
NIM stable on QoQ basis: Reported NIM was largely stable at 3.0% as the
18bps QoQ contraction in blended yields was offset by similar decrease in cost
of funds. With this, the H1FY13 NIM stood at 3.0% - flattish compared with
FY12 NIM.

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Lower provisions helps bottomline: Led by lower slippages, NPA provisions
dropped by ~20% QoQ. Further, the bank also benefitted from MTM provision
write-back of Rs460mn on its investment portfolio during the quarter.
Collectively, these benefits helped tide over higher provisions for
restructuring. At the aggregate level, provisions were down 6% QoQ and 22%
YoY to Rs4.9bn with credit costs contained at 80bps vs 100bps in the previous
quarter.
Loan mix shifts away from corporate segment: Q2FY13 loan growth of 17%
YoY matched the industry average compared with 19% avg growth in the last
two quarters. From segmental perspective, the bank is clearly shifting away
from corporate segment (down 4% QoQ) in favor of SME (9.2% QoQ) and
Retail (5.1% QoQ). The bank has guided to grow in line with industry average
for FY2013. Meanwhile, deposit growth was in line with industry at 16% YoY
(2% QoQ) with CASA ratio remaining stable at 31% QoQ. Overall CAR is weak
at 11.4% with tier-1 ratio at 8.2% and hence this remains a key risk to loan
growth targeted by the bank though they are in active dialogue with the
Government for capital infusion in the current year.
Neutral: Conservatively, we maintain stiff credit cost assumptions (110bps for
FY13 & 100bps for FY14) given sustained challenging environment for asset
quality. At the current market price, the stock trades at 6.2x FY2014E EPS and
1.1x FY2014E ABVPS. Given persistent challenges to improvement, we expect
FY14E RoE (adjusted for revaluation reserve) to reach 16.4% and hence the fair
valuation multiple of 1.1x FY14E. Given limited upside from current level (3%)
we remain Neutral on the stock with a revised price target of Rs240.