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Union Bank: Restructured book takes a hit
Jan 30, 2012

Union Bank of India (UBI) declared its results for the third quarter of financial year 2011-2012 (3QFY12). The bank has reported 28% YoY growth in interest income but a 66% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 10.2% YoY in 3QFY12, on the back of 16.8% YoY growth in advances.
  • NIMs (net interest margins) move down marginally from 3.3% in 9mFY11 to 3.2% in 9mFY12 despite increased lending yields.
  • Net NPAs move up sharply from 1.21% in 9mFY11 to 1.88% in 9mFY12. However sequentially it has seen an improvement from 2.04% levels seen in 1HFY12.
  • Net profit falls by 66% YoY in 3QFY12 on account of increased provisioning; it fell by around 32% in 9mFY12.
  • Capital adequacy ratio stands at 11.72% at the end of 3QFY12 as per Basel II.

Rs (m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Interest income 41,995 53,747 28.0% 118,374 154,009 30.1%
Interest expense 25,836 35,939 39.1% 73,377 103,686 41.3%
Net Interest Income 16,158 17,809 10.2% 44,997 50,323 11.8%
Net interest margin (%)       3.3 3.2  
Other Income 4,936 5,921 20.0% 14,382 15,770 9.6%
Other Expense 8,483 10,889 28.4% 25,025 29,543 18.1%
Provisions and contingencies 4,000 9,727 143.2% 11,961 20,239 69.2%
Profit before tax 8,612 3,114 -63.8% 22,393 16,311 -27.2%
Tax 2,816 1,144 -59.4% 7,549 6,172 -18.2%
Effective tax rate 32.7% 36.7%   33.7% 37.8%  
Profit after tax/ (loss) 5,796 1,970 -66.0% 14,844 10,139 -31.7%
Net profit margin (%) 13.8% 3.7%   12.5% 6.6%  
No. of shares (m)         524.3  
Book value per share (Rs)*         233.4  
P/BV (x)         0.9  
* (Book value as on 31st December 2011)

What has driven performance in 9mFY12?
  • Union Bank of India's share of low cost deposits (CASA) decreased marginally to 32.5% in 9mFY12 from 33.3% earlier while growing its deposit base by 10% YoY. The bank consciously shed high cost deposits in order to protect its margins. It also opened over 2 million CASA accounts over the past 9 months, in order to control costs. The bank grew its advance book by 16.8% YoY in 9mFY12, and maintained its net interest margins on account of higher lending yields. Union Banks was one of the first banks to actually cut its base lending rate by 0.1% from 10.75% to 10.65% per annum with effect from December 26, 2011. This was in anticipation of monetary easing expected from the Reserve Bank of India (RBI).

  • However, advance growth has seen a slowdown on account of the various rate hikes that the central bank has undertaken over the past few months. Going forward the bank estimates a 16-18% growth in advances for FY12. This is a third revision in growth expectations from 17-18% growth in advances stated in 1HFY12 and the 22% projected at the end of FY11. However, this is in-line with the RBI's latest revised credit growth projection of 16%. The bank has gone slow on lending, especially on short term loans. We have been relatively more conservative in our estimates for the year, on account of the economic environment. The bank however expects to maintain its NIM at around 3.2% in FY12.

    Balance sheet growth sees a slowdown...
    (Rs m) 9mFY11 % of total 9mFY12 % of total Change
    Advances 1,337,870   1,562,020   16.8%
    Deposits 1,866,550   2,053,170   10.0%
    CASA 621,060 33.3% 668,100 32.5% 7.6%
    Tem deposits 1,245,490 66.7% 1,385,070 67.5% 11.2%
    Credit deposit ratio 71.7%   76.1%    

  • The bank's cost to income ratio went up marginally from 42% in 9mFY11 to 45% in 9mFY12 mainly on higher employee costs.

  • UBI has a lot of catching up to do with its peers in fee income. The bank's fee income has grown by only 8% YoY in 1HFY12. Nevertheless, it formed merely 13% of the bank's total income in 9mFY12. The benign increase in other income has been due to lower profit on sale of investments, however recoveries have increased, and the dollar appreciation led to higher income on foreign exchange.

  • Provisions saw an increase on account of higher provisions for restructured accounts and investment depreciation which amounted to Rs 4.4 bn in 3QFY12. This severely dented profits for the quarter, which was down by 66%. Some of the loans that were restructured continued to remain as standard assets. However, the provisioning requirement for such standard assets is five times higher (at 2%) than normal ones (0.4%). A single player in the telecom space, i.e. GTL Group helped contribute to a large chunk of the Rs 20 bn which was restructured during the quarter. The bank expects slippages to be under 15% of the restructured portfolio in FY12, compared with 13% in the nine months to December. The bank also had to make provisioning for investment depreciation, both on bonds and equity of Rs 1.6 bn, compared to a gain seen in the previous nine month period.

  • UBI has witnessed a whopping 45% YoY increase in the absolute value of its gross NPAs over the last 12 months, since 3QFY11. The increase has mainly come in from the migration of smaller accounts to the system. Thus, as of now the bank has completely moved all its accounts onto the system, thus further surprises on the NPA front may come at a lower intensity. Net NPAs have also moved up from 1.21% of total advances in 9mFY11 to 1.88% in 9mFY12 however this has improved from the 1HFY12 levels of over 2%. Provisioning coverage however declined to at 63.1% for the year, from over 70% previously. Gross NPAs formed 3.33% of the gross banking credit at the end of 9mFY12 from 2.68% at the end of 9mFY11. The bank expects this to reduce to remain at around 3% at the end of March 2012, however it expects this to start coming down soon with more efforts put into recovery.

  • The bank's capital adequacy ratio currently stands at 11.72% as per Basel II norms, with Tier 1 capital at 7.98%. The bank has asked for a capital infusion from the government to the tune of Rs 2.7 bn. This will take the government's stake in the bank to 58%.

What to expect?
At the current price of Rs 215.4, the stock is valued at 0.9 times our estimated FY14 adjusted book value. The bank's performance this quarter was mainly marred by the increase in NPA provisioning on account of a sharp increase in its restructured asset book. However this appears to be a one-off as a large chunk came from a single player in the telecom space. Thus from here the performance is expected to improve as there may not be such a sharp increase going forward. The bank has also revised its estimates for loan and deposit growth, which we believe will help it focus more on its quality of assets. This has seen a sequential improvement. This is anyway in line with the RBI's credit growth projections for the year. The bank plans to focus on loan recovery going forward, which has seen traction so far this year. We have nonetheless been conservative in our estimates on loan growth and asset quality. We continue to maintain out positive 'BUY' view on the stock.

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