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Margin pressures
For 1QFY12, Union bank’s profit of Rs4.6bn (down 24% YoY) missed our
estimates largely due to higher NPL provisions- mostly one-time to meet
RBI’s new norms. Management is focussing on profitability rather than
market share and this reflects in moderation in loan growth. NIMs are
under pressure (down 34bps QoQ) due to lower CASA ratio and a pick-up
in CASA growth is critical to support profitable loan growth. Slippages
rose QoQ, but were partly offset by higher upgrades and recoveries. We
lower FY12-13 earning estimates by ~2% to build slower loan growth,
but still expect 19% Cagr in profit over FY11-14. Maintain O-PF with a
price target of Rs360 (previously 380) based on 1.5x FY13 adjusted PB.
Growth moderates as bank focuses on profitable lending
During 1QFY12, Union Bank’s loan growth moderated to 17% from 27% in 4Q
due to a combination of slower credit demand and focus on profitable loans. A
lower CASA ratio of 32% and modest growth of 12% in CASA deposits would
force bank to lower loan growth ambitions in order to defend pressure on
margins. During 1Q, margins compressed by 34bps QoQ (up 7bps YoY) to
3.1% as the increase in funding costs exceeded upward repricing of assets.
Management expects a pick-up in loan growth to 19% during FY12 and some
expansion in margins towards 2HFY12.
Rise in slippages, partly offset by higher upgrades & recoveries
Bank’s fresh slippages rose by 89% QoQ in 1QFY12 and the delinquency ratio
rose to 2.5% of past year’s loans, but this was partly offset by higher
recoveries / upgrades. A large portion of fresh slippages accrued from small/
medium ticket loans and were well spread across sectors. Slippages could be
higher in 2Q also as the bank migrates NPL recognition to fully automated
systems (agricultural loans are pending). NPL provisioning was high due to
combination of (1) one-time provisions on NPL and restructured loans as per
RBI’s new guidelines (these accounted for ~60% of NPL provisions in 1Q) and
(2) provision towards fresh slippages.
Maintain O-PF
We are lowering our loan growth forecasts marginally resulting in 2% cut in
earning estimates for FY12-13. Over the next three years, we expect the
bank to deliver 18% 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 19% Cagr in profit. We expect
ROE to expand to 20% by FY13, but with tier I CAR of 8.8%, it will need fresh
capital to support growth. Maintain O-PF
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Margin pressures
For 1QFY12, Union bank’s profit of Rs4.6bn (down 24% YoY) missed our
estimates largely due to higher NPL provisions- mostly one-time to meet
RBI’s new norms. Management is focussing on profitability rather than
market share and this reflects in moderation in loan growth. NIMs are
under pressure (down 34bps QoQ) due to lower CASA ratio and a pick-up
in CASA growth is critical to support profitable loan growth. Slippages
rose QoQ, but were partly offset by higher upgrades and recoveries. We
lower FY12-13 earning estimates by ~2% to build slower loan growth,
but still expect 19% Cagr in profit over FY11-14. Maintain O-PF with a
price target of Rs360 (previously 380) based on 1.5x FY13 adjusted PB.
Growth moderates as bank focuses on profitable lending
During 1QFY12, Union Bank’s loan growth moderated to 17% from 27% in 4Q
due to a combination of slower credit demand and focus on profitable loans. A
lower CASA ratio of 32% and modest growth of 12% in CASA deposits would
force bank to lower loan growth ambitions in order to defend pressure on
margins. During 1Q, margins compressed by 34bps QoQ (up 7bps YoY) to
3.1% as the increase in funding costs exceeded upward repricing of assets.
Management expects a pick-up in loan growth to 19% during FY12 and some
expansion in margins towards 2HFY12.
Rise in slippages, partly offset by higher upgrades & recoveries
Bank’s fresh slippages rose by 89% QoQ in 1QFY12 and the delinquency ratio
rose to 2.5% of past year’s loans, but this was partly offset by higher
recoveries / upgrades. A large portion of fresh slippages accrued from small/
medium ticket loans and were well spread across sectors. Slippages could be
higher in 2Q also as the bank migrates NPL recognition to fully automated
systems (agricultural loans are pending). NPL provisioning was high due to
combination of (1) one-time provisions on NPL and restructured loans as per
RBI’s new guidelines (these accounted for ~60% of NPL provisions in 1Q) and
(2) provision towards fresh slippages.
Maintain O-PF
We are lowering our loan growth forecasts marginally resulting in 2% cut in
earning estimates for FY12-13. Over the next three years, we expect the
bank to deliver 18% 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 19% Cagr in profit. We expect
ROE to expand to 20% by FY13, but with tier I CAR of 8.8%, it will need fresh
capital to support growth. Maintain O-PF
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