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For 2QFY2011, Union Bank reported a disappointing set of numbers,
primarily because of a switch over to system-based NPA and provision for
pension liability on an ad hoc basis. Consequently, the bank registered a
49.6% qoq and 39.9% yoy decline in net profit to `303cr, substantially below
our estimates. We maintain a Neutral rating on the stock.
Operating performance on expected lines; slippages disappoint: During
2QFY2011, advances grew by 27.2% yoy but declined marginally by 0.5% qoq,
while deposits grew by 19.3% yoy and 3.7% qoq. CASA deposits posted growth of
4.1% qoq and 18.3% yoy, driven by a 5.8% qoq and 29.1% yoy increase in
savings deposits. CASA ratio improved marginally to 32.7% in 2QFY2011 (from
32.6% in 1QFY2011). Reported NIM improved by 32bp qoq to 3.35% because of
a 48bp qoq improvement in yield on funds to 8.28% and a lower increase of
11bp qoq in cost of funds to 5.06%. Consequently, NII grew by robust 77.9% yoy
and 13.9% qoq to `1,536cr. During 2QFY2011, the bank faced substantial
asset-quality pressure due to switchover to CBS-based NPA recognition and
slippages of ~`727cr in agri and export-oriented industries. Gross NPAs
increased by 28.8% qoq to `3,524cr and net NPAs rose by 27.2% qoq to
`1,462cr. Gross slippages stood at `1,130cr v/s `623cr in 1QFY2011.
Outlook and valuation: In our view, the bank is structurally among the more
profitable and competitive PSU banks. We have a positive outlook on the bank
due to its robust traction in CASA deposits and relatively fast-expanding branch
network, due to which we expect the bank’s performance on the NII front to be
better than its peers over FY2011–12. However, at the CMP, the stock is trading
at 8.3x FY2012E EPS of `47.2 and 1.7x FY2012E ABV of `237.1, which we
believe factors in the positives. Hence, we maintain a Neutral rating on the stock.
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