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Union Bank of India
(UNBK IN)
Target price: Rs427.00
Share price: Rs386.65 (4 Nov)
Negatives appear discounted, time to take a fresh look
Earnings disappointment behind us, fresh NPLs to fall
We believe Union Bank of India’s (Union Bank) disappointing
earnings for 2Q FY11 are now largely discounted in the share
price. We also believe that 2Q FY11 should be this year’s worst
quarter for non-performing loans (NPL) and we expect fresh
formation of NPLs to fall substantially from 3Q FY11 onwards, as
around Rs7.27bn of total fresh NPLs of Rs11.3bn for 2Q FY11
were one-off in nature. Recoveries and loan upgradations (from
NPLs to the standard category) totalled Rs1.89bn for 2Q FY11 and
we expect these to pick up substantially in 2H FY11.
Negative surprise on pension liabilities seems over
We believe the new pension liability of Rs24bn cited by the bank is
already on the high side, and that Union Bank is among the few
India banks that have started providing fully already for pension
liabilities. The bank has started providing Rs1.2bn per quarter and
should amortise the liabilities over the next five years.
Despite the extra burden of pension and gratuity liabilities, we
still forecast an ROE of close to 23% for FY11 and 25% for
FY12. We reiterate our 1 (Buy) rating and six-month target price
of Rs427, reached by assigning a PBR of 1.6x (within our
Gordon Growth Model) to our FY12 BVPS forecast. We believe
that asset-quality concerns should subside in 2H FY11, as fresh
NPL formation is likely to fall substantially amid strong loan
growth of 24% and a stable net-interest margin (NIM) of around
3% forecast by us for FY11.
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