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UnionBank---------------------------------------------------------------------- Maintain OUTPERFORM
Strong 4Q results
● Union Bank reported strong 4Q results as margins and asset
quality held up better than expected.
● Despite the bank’s relatively high reliance on wholesale deposits,
4Q NIM was flat QoQ at 3.4%, which helped drive 23% YoY NII
growth. We expect NIM to moderate to 3.1% in FY12.
● Asset quality surprised positively (unlike peers) and gross
slippages were at a two-year low of 1.2%. Gross NPLs are now
down to 2.4%. With the bank also lowering coverage (200 bp QoQ
to 68%), credit costs (0.4% in 4Q) were down a sharp 73% QoQ.
● In FY11, slippages for the bank were relatively high at 2.5% and
credit costs averaged at 1%. This led to a moderation in its ROAs to
1% (1.2% over FY08-10). With improving asset quality trends over
the past two quarters, we forecast FY12-13 credit costs at 0.6-0.7%.
● Therefore, despite the moderating NIM and lower treasury
income, we forecast FY12-13 ROEs at a healthy 18-20%. With
valuations (1.1x FY13 book) at 5-15% discount to peers (even
after the 10% rise post results), we retain OUTPERFORM rating.
Better than expected NIMs
Loan growth outpaced system growth at 27% YoY, primarily driven by
corporate loans (+37% yoy). Management has guided for a 20%+ loan
growth in FY12. NII growth was healthy at 6% QoQ on better-thanexpected
margins. Reported margins were flat QoQ at 3.44% versus
our expectation of a 15 bp drop (38 bp QoQ rise in cost of deposits
was offset by a 43 bp rise in the yields). Management expects NIM of
~3.2% for FY12 (we forecast FY12 NIM at 3.1%). CASA share was
down 151 bp QoQ to 31% (savings deposits were down 4% QoQ).
Fee income growth continues to be weak at 9% YoY and fee income
is likely to lag asset growth even in FY12 (versus 4% YoY in FY11)
with rising competition. Employee expenses were up a sharp 71%
QoQ, as the bank made pension provisions (for retired employees) of
Rs3.5 bn during quarter. Outstanding pension provisions for existing
employees are at Rs13.5 bn (Rs3.4 bn per yr). The bank’s tier-I is
healthy at 8.7%.
Figure 1: 4Q11 results summary
Rs mn 4Q11 4Q10 % yoy/bp 3Q11 % qoq/bp
NII 17,165 13,961 23 16,158 6
Fee income 4,296 3,950 9 3,856 11
Total income 21,461 17,911 20 20,014 7
Total op expenses (14,475) (7,411) 95 (8,483) 71
PPoP 6,985 10,500 -33 11,531 -39
Loan loss provisions (980) (3,130) -69 (3,610) -73
Other provisions (553) (270) 105 (390) 42
Total provisions (1,533) (3,400) -55 (4,000) -62
Operating profit 5,453 7,100 -23 7,532 -28
Treasury* 1,710 975 75 1,080 58
Pre-tax profits 7,163 8,075 -11 8,612 -17
PAT 5,976 5,935 1 5,796 3
Loans 1,509,861 1,193,153 27 1,337,870 13
Deposits 2,024,613 1,700,400 19 1,866,550 8
CASA (%) 31.8 31.7 8 33.3 (151)
NIM (bp) 3.4 3.4 5 3.4 -
Tier-I (%) 8.7 7.9 78 7.4 125
Gross NPL % 2.4 2.2 17 2.7 (31)
Net NPL % 1.2 0.8 38 1.2 (2)
Coverage% (incl w.offs) 67.6 74.0 (644) 70.2 (262)
Source: Company data, * includes depr’n on investments, 8.6% incl. 1H11 profits
Asset quality surprised positively
Asset quality for the bank surprised positively unlike the trends at
other government banks. Gross slippages during the quarter were low
at Rs4.1 bn (1.2% of the loans annualised versus 2.7% for 9M FY11)
leading to a 73% QoQ drop in credit costs (0.4% in 4Q). Gross NPLs
were down 31 bp QoQ to 2.4%. Management has guided for
slippages of 1.3% in FY12. Our forecast FY12-13 credit costs are at
0.6-0.7%. Restructured loans are at 3.7% of the loans. Our FY12-13E
earnings change marginally by 4% as we factor in the recent capital
infusion by the government (Rs0.7 bn) and lower fee income.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UnionBank---------------------------------------------------------------------- Maintain OUTPERFORM
Strong 4Q results
● Union Bank reported strong 4Q results as margins and asset
quality held up better than expected.
● Despite the bank’s relatively high reliance on wholesale deposits,
4Q NIM was flat QoQ at 3.4%, which helped drive 23% YoY NII
growth. We expect NIM to moderate to 3.1% in FY12.
● Asset quality surprised positively (unlike peers) and gross
slippages were at a two-year low of 1.2%. Gross NPLs are now
down to 2.4%. With the bank also lowering coverage (200 bp QoQ
to 68%), credit costs (0.4% in 4Q) were down a sharp 73% QoQ.
● In FY11, slippages for the bank were relatively high at 2.5% and
credit costs averaged at 1%. This led to a moderation in its ROAs to
1% (1.2% over FY08-10). With improving asset quality trends over
the past two quarters, we forecast FY12-13 credit costs at 0.6-0.7%.
● Therefore, despite the moderating NIM and lower treasury
income, we forecast FY12-13 ROEs at a healthy 18-20%. With
valuations (1.1x FY13 book) at 5-15% discount to peers (even
after the 10% rise post results), we retain OUTPERFORM rating.
Better than expected NIMs
Loan growth outpaced system growth at 27% YoY, primarily driven by
corporate loans (+37% yoy). Management has guided for a 20%+ loan
growth in FY12. NII growth was healthy at 6% QoQ on better-thanexpected
margins. Reported margins were flat QoQ at 3.44% versus
our expectation of a 15 bp drop (38 bp QoQ rise in cost of deposits
was offset by a 43 bp rise in the yields). Management expects NIM of
~3.2% for FY12 (we forecast FY12 NIM at 3.1%). CASA share was
down 151 bp QoQ to 31% (savings deposits were down 4% QoQ).
Fee income growth continues to be weak at 9% YoY and fee income
is likely to lag asset growth even in FY12 (versus 4% YoY in FY11)
with rising competition. Employee expenses were up a sharp 71%
QoQ, as the bank made pension provisions (for retired employees) of
Rs3.5 bn during quarter. Outstanding pension provisions for existing
employees are at Rs13.5 bn (Rs3.4 bn per yr). The bank’s tier-I is
healthy at 8.7%.
Figure 1: 4Q11 results summary
Rs mn 4Q11 4Q10 % yoy/bp 3Q11 % qoq/bp
NII 17,165 13,961 23 16,158 6
Fee income 4,296 3,950 9 3,856 11
Total income 21,461 17,911 20 20,014 7
Total op expenses (14,475) (7,411) 95 (8,483) 71
PPoP 6,985 10,500 -33 11,531 -39
Loan loss provisions (980) (3,130) -69 (3,610) -73
Other provisions (553) (270) 105 (390) 42
Total provisions (1,533) (3,400) -55 (4,000) -62
Operating profit 5,453 7,100 -23 7,532 -28
Treasury* 1,710 975 75 1,080 58
Pre-tax profits 7,163 8,075 -11 8,612 -17
PAT 5,976 5,935 1 5,796 3
Loans 1,509,861 1,193,153 27 1,337,870 13
Deposits 2,024,613 1,700,400 19 1,866,550 8
CASA (%) 31.8 31.7 8 33.3 (151)
NIM (bp) 3.4 3.4 5 3.4 -
Tier-I (%) 8.7 7.9 78 7.4 125
Gross NPL % 2.4 2.2 17 2.7 (31)
Net NPL % 1.2 0.8 38 1.2 (2)
Coverage% (incl w.offs) 67.6 74.0 (644) 70.2 (262)
Source: Company data, * includes depr’n on investments, 8.6% incl. 1H11 profits
Asset quality surprised positively
Asset quality for the bank surprised positively unlike the trends at
other government banks. Gross slippages during the quarter were low
at Rs4.1 bn (1.2% of the loans annualised versus 2.7% for 9M FY11)
leading to a 73% QoQ drop in credit costs (0.4% in 4Q). Gross NPLs
were down 31 bp QoQ to 2.4%. Management has guided for
slippages of 1.3% in FY12. Our forecast FY12-13 credit costs are at
0.6-0.7%. Restructured loans are at 3.7% of the loans. Our FY12-13E
earnings change marginally by 4% as we factor in the recent capital
infusion by the government (Rs0.7 bn) and lower fee income.
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