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Union Bank of India (UNBK) reported a PAT of INR4.6b for 1QFY12, ~13% lower than our estimate, led by higher opex
(8% higher than our estimate) and tax rate (37% v/s our estimate of 32%). NIM decline of 35bp QoQ (~25bp adjusted)
was marginally higher than we had anticipated. Key highlights:
Gross slippages increase QoQ, as also upgradations and recoveries: Slippages during the quarter were ~INR7.7b
v/s INR4b in 4QFY11. The annualized slippage ratio for 1QFY12 was 2.05% v/s 1.3% in 4QFY11. Recoveries and
upgradations were INR3b (v/s INR2.6b in 4QFY11 and 1QFY11). Write-offs were INR3.4b. Credit cost (excluding oneoff
provisioning) stood at 0.4% v/s 0.3% in 4QFY11. UNBK expects slippages to remain high in 2QFY11 as it moves
towards system-based classification of agricultural NPAs.
Adjusted NIM down 25bp QoQ: Reported NIM declined ~35bp QoQ. While the yield on loans increased 44bp QoQ,
the cost of deposits was up 66bp. The CD ratio declined ~250bp. As a result, margins were under pressure. The
management reiterated its NIM guidance of 3.2% for FY12.
Business growth moderates: Loan growth moderated to ~17% YoY (declined ~5% QoQ), while deposits grew
~16% YoY (down ~2% QoQ). The management has scaled down its loan growth target from 22% to 19% and its
deposit growth target from 20% to 17% for FY12. CASA growth moderated to 12.5% YoY (declined 2% QoQ) led by
moderation in CA deposits.
Muted fee income growth: Non-interest income was marginally below our estimate at INR4.8b. Fee income grew
3% YoY to INR2.1b.
Valuation and view: We expect RoA of 1.1% and RoE of 22%+ over FY12-13. EPS was INR52 in FY12 and INR63 in
FY13. We estimate BV at INR252 for FY12 and INR300 for FY13. While near-term asset quality is an overhang, we
believe risk-reward is favorable. Maintain Buy, with a target price of INR390 (25% upside).
Gross slippages increase QoQ, as also upgradations and recoveries
Slippages during the quarter stood at ~INR7.7b (in line with guidance) v/s INR4b in 4QFY11.
The annualized slippage ratio for 1QFY12 stood at 2.05% v/s 1.3% in 4QFY11 and 2.4%
in FY11. Shifting to online system for identifying NPAs (for loan above below INR0.5m
(excluding agriculture) contributed to the significant increase. Management stated that
out of total slippages, INR5.5b were from accounts of lower than INR0.5m (largely led by
CBS based recognition of NPA). Agri contributed INR1b, SME INR2.2b and other PSLs
contributed INR1.8b in small account delinquency. UNBK expects slippages to remain
high in 2QFY11 as it moves towards classifying agricultural NPA's through system, post
which it expects slippages to decline significantly. Bank restructured ~INR2.3b of loans
during the quarter whereas, INR740m slipped into NPA.
Adjusted NIM down 25bp QoQ
Reported margins declined ~35bp QoQ, however adjusted for I.T. refund (INR640m in
4QFY11), margins declined 25bp QoQ, (marginally higher than estimate). While yield on
loans increased 44bp QoQ, cost of deposits was up 66bp, and ~250bp decline in CD ratio
led to pressure on margins. Management expects stable/improving margins from here on
as it expects cost of deposits to bottom out in next quarter, while benefits of re-pricing will
continue in FY12. Further, improving loan growth and asset quality in 2HFY12 will provide
cushion to NIMs. Management re-iterated its guidance for margins of 3.2% for FY12.
We model in ~15bp decline in margins for FY12.
GNPA up 3% QoQ
In absolute terms, GNPA was up 3%QoQ, while NNPA was up 5%. Recoveries and upgradation
stood at INR3b (v/s INR2.6b in 4QFY11 and 1QFY11) and write-off stood at
INR3.4b. PCR (including technical write-off) was largely stable at ~68%. Management
expects up-gradation and recoveries to be strong in FY12. During the quarter bank made
provision of INR3.6b of which INR2.15b due to change increase in provisioning requirement
for classification of NPLs and restructured loans. Credit cost for the quarter (excluding
one-off provisioning) stood at 0.4% v/s 0.3% in 4QFY11 and 0.33% in 1QFY11.
Business growth moderates
Loan growth moderates to ~17% YoY (declined ~5% QoQ), while deposits grew ~16%
YoY (down ~2% QoQ). 1Q being the lean season and moderation in demand led to decline
in loans. Mgmt has scaled down its loan and deposits target from 22% and 20% to 19 and
17% respectively, for FY12. CASA growth moderated to 12.5% YoY (declined 2% QoQ)
led by moderation in CA Deposits. While SA deposits increased 14% YoY and ~2%QoQ,
CA grew 8% YoY, but declined ~11.5% QoQ. However with decline in term deposits
CASA ratio remained largely stable at 31.5%.
Muted fee income growth
Non-interest income was marginally below our est. at INR4.8b (v/s exp of INR4.9b). Fee
income grew 3%YoY to INR2.1b. Muted fee income growth is disappointing, management
guides for fee income growth of 10-15% for FY12. Income from forex was at INR1b as
against 510m in 4QFY11 and INR1.2b in 4QFY11. Recoveries from written off account
stood at INR590m v/s INR980m a quarter ago and INR380m a year ago.
Opex 8% higher than estimate
Higher than expected employee expense (INR5.9b v/s estimate of 5.2b) led to negative
surprise on opex. Employee expense grew 36% YoY (though declined 44% QoQ - on a
higher base), while other exp. increased 4% YoY to INR3.1b. During the quarter bank
provided INR1b towards gratuity and pension liability (unamortized portion at end of FY11
stood at INR16.2b). Tax rate at 37% (v/s est. of 32%; and 29% in 1QFY11 and 17% in
4QFY11). Non-allowance of certain one-off provisions led to increase in tax rate.
Valuation and view
While pressure on asset quality is expected to continue in 2QFY12 as bank migrates
fully towards system based recognition of NPA, it will improve sharply in 2HFY12
and FY13. Improvement in up-gradations and recoveries is encouraging and if it sustains
or improves further, will not only lead to lower credit but also better than expected
margins. Management expects slippages to decline significantly and with strong upgradation
and recoveries to contain GNPA at ~2% from 2.6% now. We model in
slippage ratio of 1.7% and 1.8% in FY12 and FY13.
We model in NIM decline of 15bp YoY in FY12 leading to lower NII growth of 14%
YoY however, strong operating leverage will lead to 25% growth in operating profits.
In FY11, opex grew 58% YoY led by 90%+ increase in employee expense (due to
pension and gratuity related provisions).
Capital will not be a constraint for growth as the Government of India has already
infused INR6.8b equity in FY11 and is expected to infuse Rs4b more in FY12.
We expect RoA and RoE to be 1.1% and 22%+ over FY12-13, EPS of INR 52 in
FY12 and INR63 in FY13. BV is expected to be INR252 in FY12 and INR300 in
FY13. While in near term asset quality is an overhang, we believe risk reward ratio is
favorable; maintain Buy with a target price of target price of INR390 (25% upside).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Union Bank of India (UNBK) reported a PAT of INR4.6b for 1QFY12, ~13% lower than our estimate, led by higher opex
(8% higher than our estimate) and tax rate (37% v/s our estimate of 32%). NIM decline of 35bp QoQ (~25bp adjusted)
was marginally higher than we had anticipated. Key highlights:
Gross slippages increase QoQ, as also upgradations and recoveries: Slippages during the quarter were ~INR7.7b
v/s INR4b in 4QFY11. The annualized slippage ratio for 1QFY12 was 2.05% v/s 1.3% in 4QFY11. Recoveries and
upgradations were INR3b (v/s INR2.6b in 4QFY11 and 1QFY11). Write-offs were INR3.4b. Credit cost (excluding oneoff
provisioning) stood at 0.4% v/s 0.3% in 4QFY11. UNBK expects slippages to remain high in 2QFY11 as it moves
towards system-based classification of agricultural NPAs.
Adjusted NIM down 25bp QoQ: Reported NIM declined ~35bp QoQ. While the yield on loans increased 44bp QoQ,
the cost of deposits was up 66bp. The CD ratio declined ~250bp. As a result, margins were under pressure. The
management reiterated its NIM guidance of 3.2% for FY12.
Business growth moderates: Loan growth moderated to ~17% YoY (declined ~5% QoQ), while deposits grew
~16% YoY (down ~2% QoQ). The management has scaled down its loan growth target from 22% to 19% and its
deposit growth target from 20% to 17% for FY12. CASA growth moderated to 12.5% YoY (declined 2% QoQ) led by
moderation in CA deposits.
Muted fee income growth: Non-interest income was marginally below our estimate at INR4.8b. Fee income grew
3% YoY to INR2.1b.
Valuation and view: We expect RoA of 1.1% and RoE of 22%+ over FY12-13. EPS was INR52 in FY12 and INR63 in
FY13. We estimate BV at INR252 for FY12 and INR300 for FY13. While near-term asset quality is an overhang, we
believe risk-reward is favorable. Maintain Buy, with a target price of INR390 (25% upside).
Gross slippages increase QoQ, as also upgradations and recoveries
Slippages during the quarter stood at ~INR7.7b (in line with guidance) v/s INR4b in 4QFY11.
The annualized slippage ratio for 1QFY12 stood at 2.05% v/s 1.3% in 4QFY11 and 2.4%
in FY11. Shifting to online system for identifying NPAs (for loan above below INR0.5m
(excluding agriculture) contributed to the significant increase. Management stated that
out of total slippages, INR5.5b were from accounts of lower than INR0.5m (largely led by
CBS based recognition of NPA). Agri contributed INR1b, SME INR2.2b and other PSLs
contributed INR1.8b in small account delinquency. UNBK expects slippages to remain
high in 2QFY11 as it moves towards classifying agricultural NPA's through system, post
which it expects slippages to decline significantly. Bank restructured ~INR2.3b of loans
during the quarter whereas, INR740m slipped into NPA.
Adjusted NIM down 25bp QoQ
Reported margins declined ~35bp QoQ, however adjusted for I.T. refund (INR640m in
4QFY11), margins declined 25bp QoQ, (marginally higher than estimate). While yield on
loans increased 44bp QoQ, cost of deposits was up 66bp, and ~250bp decline in CD ratio
led to pressure on margins. Management expects stable/improving margins from here on
as it expects cost of deposits to bottom out in next quarter, while benefits of re-pricing will
continue in FY12. Further, improving loan growth and asset quality in 2HFY12 will provide
cushion to NIMs. Management re-iterated its guidance for margins of 3.2% for FY12.
We model in ~15bp decline in margins for FY12.
GNPA up 3% QoQ
In absolute terms, GNPA was up 3%QoQ, while NNPA was up 5%. Recoveries and upgradation
stood at INR3b (v/s INR2.6b in 4QFY11 and 1QFY11) and write-off stood at
INR3.4b. PCR (including technical write-off) was largely stable at ~68%. Management
expects up-gradation and recoveries to be strong in FY12. During the quarter bank made
provision of INR3.6b of which INR2.15b due to change increase in provisioning requirement
for classification of NPLs and restructured loans. Credit cost for the quarter (excluding
one-off provisioning) stood at 0.4% v/s 0.3% in 4QFY11 and 0.33% in 1QFY11.
Business growth moderates
Loan growth moderates to ~17% YoY (declined ~5% QoQ), while deposits grew ~16%
YoY (down ~2% QoQ). 1Q being the lean season and moderation in demand led to decline
in loans. Mgmt has scaled down its loan and deposits target from 22% and 20% to 19 and
17% respectively, for FY12. CASA growth moderated to 12.5% YoY (declined 2% QoQ)
led by moderation in CA Deposits. While SA deposits increased 14% YoY and ~2%QoQ,
CA grew 8% YoY, but declined ~11.5% QoQ. However with decline in term deposits
CASA ratio remained largely stable at 31.5%.
Muted fee income growth
Non-interest income was marginally below our est. at INR4.8b (v/s exp of INR4.9b). Fee
income grew 3%YoY to INR2.1b. Muted fee income growth is disappointing, management
guides for fee income growth of 10-15% for FY12. Income from forex was at INR1b as
against 510m in 4QFY11 and INR1.2b in 4QFY11. Recoveries from written off account
stood at INR590m v/s INR980m a quarter ago and INR380m a year ago.
Opex 8% higher than estimate
Higher than expected employee expense (INR5.9b v/s estimate of 5.2b) led to negative
surprise on opex. Employee expense grew 36% YoY (though declined 44% QoQ - on a
higher base), while other exp. increased 4% YoY to INR3.1b. During the quarter bank
provided INR1b towards gratuity and pension liability (unamortized portion at end of FY11
stood at INR16.2b). Tax rate at 37% (v/s est. of 32%; and 29% in 1QFY11 and 17% in
4QFY11). Non-allowance of certain one-off provisions led to increase in tax rate.
Valuation and view
While pressure on asset quality is expected to continue in 2QFY12 as bank migrates
fully towards system based recognition of NPA, it will improve sharply in 2HFY12
and FY13. Improvement in up-gradations and recoveries is encouraging and if it sustains
or improves further, will not only lead to lower credit but also better than expected
margins. Management expects slippages to decline significantly and with strong upgradation
and recoveries to contain GNPA at ~2% from 2.6% now. We model in
slippage ratio of 1.7% and 1.8% in FY12 and FY13.
We model in NIM decline of 15bp YoY in FY12 leading to lower NII growth of 14%
YoY however, strong operating leverage will lead to 25% growth in operating profits.
In FY11, opex grew 58% YoY led by 90%+ increase in employee expense (due to
pension and gratuity related provisions).
Capital will not be a constraint for growth as the Government of India has already
infused INR6.8b equity in FY11 and is expected to infuse Rs4b more in FY12.
We expect RoA and RoE to be 1.1% and 22%+ over FY12-13, EPS of INR 52 in
FY12 and INR63 in FY13. BV is expected to be INR252 in FY12 and INR300 in
FY13. While in near term asset quality is an overhang, we believe risk reward ratio is
favorable; maintain Buy with a target price of target price of INR390 (25% upside).
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