Union Bank :: Better than peers ::CLSA

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Union Bank -

Better than peers
For 4QFY11, Union Bank reported net profit of Rs6bn (up 1% YoY) and inline
with our estimates. More importantly, its core operating performance
was much better than peers with margins being stable QoQ and decline in
fresh slippages. We expect loans to grow at 20% Cagr over FY11-13CL
and slower growth in operating costs to drive 23% growth in earnings.
ROE should expand to 20% by FY13, but bank would need to raise fresh
capital to support growth plans. Superior relative performance in 4QFY11
should support some re-rating. Maintain O-PF with price target of Rs380
based on 1.5x FY13 adjusted PB.

Stable margins support earnings, but we see pressure in future
During 4QFY11, Union Bank’s net profit was supported by a healthy 23% YoY
growth in NII on the back of 26% growth in loans. In spite of rise in cost of
deposits, the bank was able to maintain stable margins (QoQ) supported by
re-pricing of loans and healthy CASA ratio of 32% of deposits. However, we
expect margins to be under pressure going forward as CASA growth (19%
YoY) is lagging behind loan growth. While fee growth continues to be low,
higher treasury gains (11% of PBT) boosted earnings. The bank has writtenoff
pension liability on retired employees, but the impact on earnings was
partly offset by reversal of provision for new gratuity liability.
Improvement in asset quality trends was a positive surprise
A marked improvement in asset quality trends was the key positive in bank’s
results- when compared to its recent track-record and performance of other
PSU banks in 4Q. Over the past few quarters, high fresh slippages had raised
concerns on bank’s asset quality, but the decline in delinquency ratio to 1.3%
of last year’s loans (from 2.9% in 3Q) should abate concerns. Moreover, the
moderation in asset quality pressures has come when most peers reported
sharp rise in fresh slippages. But coverage ratio remains low at 50% (68%
including technical write-off) and the bank will need to improve it.
Maintain O-PF
Over FY11-13, we expect the bank to deliver 20% Cagr in loans, but topline
growth is likely to be lower due to pressure on margins and lower growth in
fee income. Lower growth in operating costs (from a high base) will support
22% Cagr in profit. We expect ROE to expand to 20% by FY13, but with tier I
CAR of 8.7%, it will need fresh capital to support growth. We maintain our OPF
recommendation with price target of Rs380 (raised from Rs370) based on
1.5x FY13 adjusted PB.