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Union Bank (UNBK)
Banks/Financial Institutions
A few disappointments eclipse improvements on many fronts. Union Bank’s
reported earnings declined by 66% yoy on the back of higher provisions (restructured
asset and staff costs) despite margin expansion, healthy non-interest income growth
and lower slippages. We revise earnings sharply to factor the current quarter
performance. Current valuations are attractive, reiterate BUY. We believe that lesser
overhang of asset quality deterioration (post recent clean-up) will improve valuations.
Higher provisions dent earnings but expect improvement from here; maintain BUY
We see quite a few positives in the current quarter despite high provisions severely impacting
profits—(1) margins expanded 10 bps qoq, (2) slippages were lower at 1.5% but include one large
corporate slippage. Large chunky stressed exposures got restructured, thereby providing
confidence in the underlying loans, (3) investment depreciation likely to reverse in 4QFY12E at
current rates while treasury income is likely to see higher contribution going forward.
We maintain our BUY recommendation and believe that confidence in the bank should improve as
we see consistency in slippages and improvement in recoveries over the next few quarters. We see
lower risks of an NPV hit from restructuring of loans in the power sector (unlike other banks) as it
is primarily to select strong SEBs. On the back of weak results for the quarter, we revise earnings
by 20% for FY2012-14E to factor (1) higher loan-loss provisions, (2) lower loan growth and (3)
slower fee income growth. The stock is trading at 0.9X book and 7X FY2012E EPS. We have
revised our TP to `340 (from `425 earlier) primarily factoring the above changes.
NPLs stable qoq due to lower slippages and higher write-offs; restructuring higher
Union Bank reported a stable gross NPL qoq as the bank saw fewer slippages (1.5% of loans) but
wrote off higher loans (0.8% of loans). Gross NPLs were at `52 bn (3.3% of loans) while net NPLs
declined 3% qoq to `29 bn (1.9% of loans). Slippages were lower at 1.5% levels which included
one large account contributing to nearly a third of the fresh slippage. However, we have not
noticed an increase in recoveries/upgradation despite a large slippage reported in 1HFY12, which
is disappointing. Higher write-offs, improvement in coverage ratio and provisions for restructured
loans resulted in LLP being high at 2.2%. Coverage ratio is at 45% (63% including technical writeoff).
We are broadly expecting loan-loss provisions at 1.1% levels and slippages at 2.3% levels for
FY2013-14E.
Restructured loans increased sharply to `86 bn (5.5% of loans—gross, 3%—net)—an increase of
31% qoq due to one large restructuring pertaining to the telecom sector. NPV provision for this
exposure was nearly 25%—sharply impacting profitability for the quarter. Based on the current
proposals, the bank does not expect more than 15-20% increase in the overall restructured loans
in the medium term.
NIMs improve 10 bps qoq to 3.3%; marginal benefit from tax refunds
NIMs improved 10 bps qoq to 3.3% as the bank benefitted from better asset yields, interest
income from tax refunds and marginal improvement in CD ratio. Yield on funds improved by
about 30 bps while costs increased by about 20 bps. We note that interest income from tax
refunds has had a positive benefit of about 5-7 bps in the current quarter. NII grew by 10%
yoy to `17.8 bn. The higher margins is clearly benefitting the bank as it is the cushioning the
sharp rise in credit costs. However, we do expect NIM to decline over the next few quarters
as pricing power shifts to lenders and factor a decline of about 15 bps by FY2014E.
Loan growth muted at 2% YTD; CASA ratio stable qoq at 32%
Loan growth for the quarter is fairly muted at 2% YTD though reported growth looks
impressive at 17% yoy. Sequentially growth has picked up at 6% though it is primarily
driven by the large corporate segment. Infrastructure exposure is nearly 15% of the overall
exposure of which two-third exposure is to power and 15% to roads. Exposure to SEB is
about 50% of the power exposure and the balance is primarily on the generation side.
The bank is looking to grow in line with industry average for FY2012E on the back of
lending to large corporates and meeting priority sector targets. Reclassification of select
exposure has resulted in 25% qoq decline in agriculture loans. We believe that the bank
would be able to achieve 15% CAGR for FY2011-14E.
Deposit growth was lower than industry at 10% yoy (5% qoq increase) to `2.1 tn. CASA
ratio improved by 50 bps qoq 32.5% on the back of strong growth in current deposits.
Other highlights of the quarter
Non-interest income grew 20% yoy on the back of 16% yoy growth in fee income. Union
Bank reported flat growth in exchange income—a sharp contrast to other banks. Treasury
profit declined 7% yoy. Given the current interest rates, we expect the investment
depreciation (equity and bond portfolio) provided in 3QFY12 to be reversed.
Overall CAR is at 11.7% with tier-1 ratio at 8.0%. The bank also announced a dilution of
2% through a preferential issue to the Government of India. Impact on capital adequacy
is fairly limited as the bank is expected to raise a nominal amount of `2.3 bn (FY2012E
net worth of `140 bn).
The bank has made an ad hoc provision of `1.1 bn for retirement benefits.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Union Bank (UNBK)
Banks/Financial Institutions
A few disappointments eclipse improvements on many fronts. Union Bank’s
reported earnings declined by 66% yoy on the back of higher provisions (restructured
asset and staff costs) despite margin expansion, healthy non-interest income growth
and lower slippages. We revise earnings sharply to factor the current quarter
performance. Current valuations are attractive, reiterate BUY. We believe that lesser
overhang of asset quality deterioration (post recent clean-up) will improve valuations.
Higher provisions dent earnings but expect improvement from here; maintain BUY
We see quite a few positives in the current quarter despite high provisions severely impacting
profits—(1) margins expanded 10 bps qoq, (2) slippages were lower at 1.5% but include one large
corporate slippage. Large chunky stressed exposures got restructured, thereby providing
confidence in the underlying loans, (3) investment depreciation likely to reverse in 4QFY12E at
current rates while treasury income is likely to see higher contribution going forward.
We maintain our BUY recommendation and believe that confidence in the bank should improve as
we see consistency in slippages and improvement in recoveries over the next few quarters. We see
lower risks of an NPV hit from restructuring of loans in the power sector (unlike other banks) as it
is primarily to select strong SEBs. On the back of weak results for the quarter, we revise earnings
by 20% for FY2012-14E to factor (1) higher loan-loss provisions, (2) lower loan growth and (3)
slower fee income growth. The stock is trading at 0.9X book and 7X FY2012E EPS. We have
revised our TP to `340 (from `425 earlier) primarily factoring the above changes.
NPLs stable qoq due to lower slippages and higher write-offs; restructuring higher
Union Bank reported a stable gross NPL qoq as the bank saw fewer slippages (1.5% of loans) but
wrote off higher loans (0.8% of loans). Gross NPLs were at `52 bn (3.3% of loans) while net NPLs
declined 3% qoq to `29 bn (1.9% of loans). Slippages were lower at 1.5% levels which included
one large account contributing to nearly a third of the fresh slippage. However, we have not
noticed an increase in recoveries/upgradation despite a large slippage reported in 1HFY12, which
is disappointing. Higher write-offs, improvement in coverage ratio and provisions for restructured
loans resulted in LLP being high at 2.2%. Coverage ratio is at 45% (63% including technical writeoff).
We are broadly expecting loan-loss provisions at 1.1% levels and slippages at 2.3% levels for
FY2013-14E.
Restructured loans increased sharply to `86 bn (5.5% of loans—gross, 3%—net)—an increase of
31% qoq due to one large restructuring pertaining to the telecom sector. NPV provision for this
exposure was nearly 25%—sharply impacting profitability for the quarter. Based on the current
proposals, the bank does not expect more than 15-20% increase in the overall restructured loans
in the medium term.
NIMs improve 10 bps qoq to 3.3%; marginal benefit from tax refunds
NIMs improved 10 bps qoq to 3.3% as the bank benefitted from better asset yields, interest
income from tax refunds and marginal improvement in CD ratio. Yield on funds improved by
about 30 bps while costs increased by about 20 bps. We note that interest income from tax
refunds has had a positive benefit of about 5-7 bps in the current quarter. NII grew by 10%
yoy to `17.8 bn. The higher margins is clearly benefitting the bank as it is the cushioning the
sharp rise in credit costs. However, we do expect NIM to decline over the next few quarters
as pricing power shifts to lenders and factor a decline of about 15 bps by FY2014E.
Loan growth muted at 2% YTD; CASA ratio stable qoq at 32%
Loan growth for the quarter is fairly muted at 2% YTD though reported growth looks
impressive at 17% yoy. Sequentially growth has picked up at 6% though it is primarily
driven by the large corporate segment. Infrastructure exposure is nearly 15% of the overall
exposure of which two-third exposure is to power and 15% to roads. Exposure to SEB is
about 50% of the power exposure and the balance is primarily on the generation side.
The bank is looking to grow in line with industry average for FY2012E on the back of
lending to large corporates and meeting priority sector targets. Reclassification of select
exposure has resulted in 25% qoq decline in agriculture loans. We believe that the bank
would be able to achieve 15% CAGR for FY2011-14E.
Deposit growth was lower than industry at 10% yoy (5% qoq increase) to `2.1 tn. CASA
ratio improved by 50 bps qoq 32.5% on the back of strong growth in current deposits.
Other highlights of the quarter
Non-interest income grew 20% yoy on the back of 16% yoy growth in fee income. Union
Bank reported flat growth in exchange income—a sharp contrast to other banks. Treasury
profit declined 7% yoy. Given the current interest rates, we expect the investment
depreciation (equity and bond portfolio) provided in 3QFY12 to be reversed.
Overall CAR is at 11.7% with tier-1 ratio at 8.0%. The bank also announced a dilution of
2% through a preferential issue to the Government of India. Impact on capital adequacy
is fairly limited as the bank is expected to raise a nominal amount of `2.3 bn (FY2012E
net worth of `140 bn).
The bank has made an ad hoc provision of `1.1 bn for retirement benefits.
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