Union Bank of India - Downgrade to Hold :: ICICI Sec

Visit http://indiaer.blogspot.com/ for complete details �� ��


Union Bank of India 
Hold
Downgrade from Buy
Costs and slippages mar earnings



Key issues hurting Union Bank of India’s Q2FY11 profitability were higher-thanexpected
provisions for the second pension option (Rs1.2bn) and gratuity
(Rs1.27bn) coupled with high slippages led by classification as NPA of Rs4.17bn
under Agricultural Debt Waiver and Relief Scheme (ADWRS, associated provision:
Rs2.9bn) and of Rs3.1bn one-time slippages from three large accounts. NIMs (net
of one-offs) were healthy at 3.21% (up 18bs QoQ). Other income (ex-treasury) was
up a fair 12.3% YoY. GNPA increased Rs7.88bn QoQ on absolute basis. GNPA and
NNPA ratios increased 60bps & 24bps to 2.79% & 1.18% respectively. We foresee
headwinds to earnings from higher pension, gratuity and NPA-related provisions.
However, the margins look healthier and core fee income should pick up as the
year wears on. We value the bank at 1.7x FY12E ABV or Rs398/share. However,
current valuations offer little upside, so we downgrade the stock to HOLD.
􀁦 Business momentum healthy, margins looking up. Q2FY11 business growth of
22.4% YoY was a result of high credit growth of 27.2% YoY and 19.3% YoY growth
in deposits. CASA ratio was healthy at 32.7%. Margins contained Rs1.24bn
exceptional income from Income Tax Refund and a reversal of Rs620mn interest
due to slippages. Adjusting for one-offs, NIMs stood at 3.21% (3.35% otherwise) in
Q2FY11 – up 18bps QoQ. Improvement in NIMs was led by increase in yields
coupled with contained deposit costs. We expect NIMs to be healthy at ~3.0% over
FY10-12E.
􀁦 Costs inflate on pension & gratuity provisions, fee income tepid. The 93.5%
spike in staff expenses was due to provisions of Rs1.27bn provision for gratuity and
Rs1.2bn for 2nd pension option. Management has doubled its guidance for overall
provisions for the latter to Rs24bn (to be amortised over 5years) alongwith an
additional Rs1.27bn for gratuity in H2FY11; we factor these into our estimates. Fee
income growth of 9% YoY was muted. Trading gains of Rs1.31bn in Q2FY11 were
32% lower YoY.
􀁦 Provisions high to cover for extraordinary slippages. The bank classified
Rs4.17bn under ADWRS as NPA, for which it provided Rs2.9bn, and placed twothree
large accounts aggregating Rs3.1bn in NPA. While slippages appear to have
peaked out, they will continue to remain meaningful in H2FY11. We expect the
transfer to system-based NPA recognition to throw up some slippages.
􀁦 Downgrade to HOLD on headwinds, valuations. Though NIMs are expected to
remain strong at ~3% over FY10-12E, possibility of higher slippages-driven credit
costs (80bps and 75bps for FY11E and FY12E respectively) and 2nd pension-related
provisions will weigh upon earnings. Further, at 1.7x FY12E ABV, the stock appears
fully priced. Downgrade to HOLD on asset quality concerns & expensive valuations.