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Union Bank: Write-backs sweeten performance - Views on News from Equitymaster
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Union Bank: Write-backs sweeten performance
Jan 28, 2009

Performance summary
  • Interest income grows by 31% YoY in 9mFY09 on the back of 25% YoY growth in advances.
  • Other income growth remains flat despite support of fee income.
  • Net interest margin improves to 3.0% in 9mFY09 from 2.8% in 9mFY08.
  • Capital adequacy ratio at 13.4% as per Basel II at the end of 9mFY09.
  • Net NPA ratio improves from 0.4% to 0.1% in the last 12 months.


Rs (m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Interest income 24,223 32,616 34.6% 67,348 88,262 31.1%
Interest Expense 16,705 21,333 27.7% 45,924 59,126 28.7%
Net Interest Income 7,518 11,283 50.1% 21,424 29,136 36.0%
NIM (%) 2.8% 3.0%
Other Income 3,837 3,921 2.2% 8,864 8,970 1.2%
Other Expense 4,997 6,656 33.2% 13,391 16,402 22.5%
Provisions and contingencies 1,108 (449) 3,637 4,541 24.9%
Profit before tax 5,250 8,997 71.4% 13,260 17,163 29.4%
Tax 1,600 2,280 42.5% 4,600 4,550 -1.1%
Profit after tax / (loss) 3,650 6,717 84.0% 8,660 12,613 45.6%
Net profit margin (%) 15.1% 20.6% 12.9% 14.3%
No. of shares (m) 505.1
Book value per share (Rs)* 135.9
P/BV (x) 1.1
* (Book value as on 31st December 2008)

What has driven performance in 3QFY09?
  • In what can be called a commendable performance of Union Bank of India (UBI) for the nine month period ended December 2008, the bank has managed to balance growth across all the parameters without showing any stress. UBI has managed to hedge the slowdown in the growth of retail and agriculture segments by tapping the SME clients. The higher yield on advances and increased CASA proportion also helped the bank improve its NIMs by 0.2%. It may be recalled that the bank had set a target of growing advances and deposits by 22% YoY and 23% YoY respectively, enhancing its CASA proportion by 2% annually and is targeting NIM of 2.8% for FY09. It seems well in track of meeting its targets.

    Leveraging SME support
    9mFY08 % of total 9mFY09 % of total Change
    Advances 742,517 929,780 25.2%
    Corporate 258,347 34.8% 335,750 36.1% 30.0%
    Agriculture 299,120 40.3% 350,080 37.7% 17.0%
    Retail 74,030 10.0% 97,830 10.5% 32.1%
    SME 111,020 15.0% 146,120 15.7% 31.6%
    Deposits 992,270 1,296,470 30.7%
    CASA 328,430 33.3% 393,780 34.8% 19.9%
    Term deposits 663,840 66.7% 902,690 65.2% 36.0%

  • The bank’s cost to income ratio marginally dropped from 44.0% in 9mFY08 to 43% in 9mFY09 despite the provision for wage arrears as also for brand building expenses. Also, the bank had proactively fully provided for its AS15 requirement of Rs 3.5 bn in FY08 itself. Thus, it is unlikely to see any negative or one time cost surprises in the medium term. We expect this cost advantage to further improve the bank’s efficiency ratios. The bank expects its cost to income ratio to stabilise at 41% by FY10 (one of the lowest in the banking sector).

  • UBI has a lot of catching up to do with its peers in fee income, which forms merely 19% of the bank’s total income. The growth in other income has also been very marginal as the bank had 67% of the investment in the held-to-maturity basket (HTM) at the end of 9mFY09.

  • While UBI has witnessed a significant reduction in the absolute value of its gross NPAs over the last 12 months (from 2.1% to 1.7%); the net NPAs too have declined from 0.4% of total advances in 1HFY08 to 0.1% in 9mFY09, bringing it to the lowest in the sector. More importantly, the NPA coverage ratio stood at 92%at the end of 9mFY09 (84% in 9mFY08).

What to expect?
At the current price of Rs 146, the stock is valued at 0.7 times our estimated FY11 adjusted book value. UBI is currently comfortably placed in terms of capital adequacy to grow its business and for Basel II compliance. Further, adequate capital, a high provisioning cover and reasonable consistency in asset quality makes it a de-risked play in the PSU banking space. We reiterate our positive view on the stock.

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