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Union Bank: Paying the price for growth - Views on News from Equitymaster
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Union Bank: Paying the price for growth
Jan 28, 2010

Performance summary
  • Interest income grows by 13% YoY in 9mFY10 on the back of 15% YoY growth in advances.
  • Other income grows by 68% YoY on the back of 32% YoY growth in fees.
  • Net interest margin drops from 3.3% in 9mFY09 to 2.4% in 9mFY10 due to pricing pressure
  • Capital adequacy ratio at 13.5% as per Basel II at the end of 9mFY10.
  • Net NPA ratio higher at 0.6% in 9mFY10 from 0.3% in 9mFY09.


Rs (m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Interest income 32,584 32,935 1.1% 85,997 96,744 12.5%
Interest Expense 21,333 22,289 4.5% 57,125 69,447 21.6%
Net Interest Income 11,251 10,646 -5.4% 28,872 27,297 -5.5%
NIM (%)       3.3% 2.4%  
Other Income 3,954 4,647 17.5% 9,235 15,488 67.7%
Other Expense 6,656 6,152 -7.6% 16,402 17,667 7.7%
Provisions and contingencies (449) 1,611 -458.8% 4,541 4,864 7.1%
Profit before tax 8,998 7,530 -16.3% 17,164 20,254 18.0%
Tax 2,280 2,190 -3.9% 4,550 5,440 19.6%
Profit after tax / (loss) 6,718 5,340 -20.5% 12,614 14,814 17.4%
Net profit margin (%) 20.6% 16.2%   14.7% 15.3%  
No. of shares (m)         505.1  
Book value per share (Rs)*         167.3  
P/BV (x)         1.5  
* Book value as on 31st December 2009

What has driven performance in 9mFY10?
  • Showing some instability in its asset growth, Union Bank of India (UBI) managed to grow its advance book by 15% YoY in 9mFY10, while partially sacrificing margins and asset quality. In order to hedge the slowdown in the growth of retail and agriculture segments, the bank tapped SME clients. However, the pricing pressure on advances hurt UBIís net interest margins (NIMs). While the bank had to pass on lower interest rates to loan customers, the high cost bulk deposits in its books kept its interest costs high during 9mFY10. Thus despite sustenance of CASA proportion, UBIís NIMs were significantly lower in 9mFY10 as compared to that in 9mFY09. As per UBI, the repayment of bulk deposits is likely to improve NIMs to 2.6% by the end of FY10. On a conservative basis we have estimated UBIís NIMs at 2.2% for FY10.

    Leveraging SME support
      9mFY09 % of total 9mFY10 % of total Change
    Advances 929,780   1,065,340   14.6%
    Corporate 547,290 58.9% 565,260 53.1% 3.3%
    Agriculture 138,540 14.9% 175,350 16.5% 26.6%
    Retail 97,830 10.5% 118,430 11.1% 21.1%
    SME 146,120 15.7% 206,300 19.4% 41.2%
    Deposits 1,296,470   1,510,850   16.5%
    CASA 393,780 30.4% 488,610 32.3% 24.1%
    Term deposits 902,690 69.6% 1,022,240 67.7% 13.2%

  • The bankís cost to income ratio dropped marginally from 43% in 9mFY09 to 41% in 9mFY10 due to the base effect of provision for wage arrears and brand building expenses in the corresponding quarter of FY09. We expect this cost advantage to further improve the bankís efficiency ratios. The bank expects its cost to income ratio to stabilise at 41% by FY11 (one of the lowest in the banking sector).

  • Although UBI does have a lot of catching up to do with its peers in fee income, the same have shown signs of improvement over the past few quarters. The bankís fee income has grown by 32% YoY in 9mFY10. Nevertheless, it formed merely 5% of the bankís total income in 9mFY10. The growth in other income has been aided by gains on the treasury portfolio and recovery of non-performing loans.

  • While UBI has witnessed a 34% YoY increase in the absolute value of its gross NPAs over the last 12 months; primarily from the bankís SME assets. The net NPAs have also moved up from 0.1% of total advances in 9mFY09 to 0.6% in 9mFY10. Having said that, the NPA coverage ratio stood at 80% at the end of 9mFY10, well above the RBIís mandate of 70% coverage. The restructured loans stood at Rs 2.3 bn at the end of 9mFY10.

What to expect?
At the current price of Rs 256, the stock is valued at 1.0 time our estimated FY12 adjusted book value. Despite sustenance of a healthy current and savings account mix, the deterioration in margins and asset quality, albeit temporary, are our prime concerns about the bank. Going forward, with technological upgradation although the growth prospects of the bank appear enthusing, excessive reliance on treasury income may prove to be risky. Having said that, most of the near term risks already seem to be priced in and we continue to retain our positive view on the stock.

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