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Union Bank: Provisions nullify margin benefits
Feb 1, 2011

Union Bank of India declared its 3QFY11 results. The bank has reported 48% YoY and 9% YoY growth in net interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Interest income grows by 21% YoY in 9mFY11 on the back of 26% YoY growth in advances.
  • Other income falls by 3% YoY due to lower treasury income.
  • Net interest margin improves from 2.8% in 9mFY10 to 3.4% in 9mFY11 due to re-pricing of assets.
  • Capital adequacy ratio at 11.9% as per Basel II at the end of 9mFY11.
  • Net NPA ratio higher at 1.2% in 9mFY11 from 0.6% in 9mFY10.


Rs (m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Interest income    33,183      41,995 26.6%       97,410    118,374 21.5%
Interest Expense    22,289      25,836 15.9%       69,447       73,377 5.7%
Net Interest Income    10,894      16,159 48.3%       27,963       44,997 60.9%
NIM (%)       2.8% 3.4%  
Other Income      4,400 4,936 12.2%       14,822       14,382 -3.0%
Other Expense      6,152 8,483 37.9%       17,667       25,025 41.6%
Provisions and contingencies      1,611 3,999 148.2% 4,864       11,961 145.9%
Profit before tax      7,531 8,613 14.4%       20,254       22,393 10.6%
Tax      2,190 2,816 28.6% 5,440 7,550 38.8%
Profit after tax / (loss)      5,341 5,797 8.5%       14,814       14,843 0.2%
Net profit margin (%) 16.1% 13.8%   15.2% 12.5%  
No. of shares (m)       505.1 505.1  
Book value per share (Rs)*         205.0  
P/BV (x)         1.6  

What has driven performance in 3QFY11?
  • Union Bank of India (UBI) managed to enhance its share of low cost deposits to 33% in 9mFY11 while growing its deposit base by 24% YoY, ahead of the sector average. The bank grew its advance book by 26% YoY in 9mFY11, without sacrificing on margins. In order to hedge the slowdown in the growth of retail and agriculture segments, the bank tapped large corporate clients. The higher proportion of CASA enabled the banks to get back to its long term average NIMs that were impacted by the bulk deposit rates in FY10. Re-pricing the corporate loans as per the base rate also helped the bank improve margins. Going forward the bank estimates 25% growth in advances and NIMs in the range of 2.8% to 3% in the near term.

    Leveraging large corporate support
      9mFY10 % of total 9mFY11 % of total Change
    Advances    1,065,340       1,337,870   25.6%
    Corporate       565,260 53.1%        756,110 56.5% 33.8%
    Agriculture       175,350 16.5%        192,520 14.4% 9.8%
    Retail       118,430 11.1%        152,190 11.4% 28.5%
    SME       206,300 19.4%        237,050 17.7% 14.9%
    Deposits    1,510,850       1,866,550   23.5%
    CASA       488,610 32.3%        621,060 33.3% 27.1%
    Term deposits    1,022,240 67.7%     1,245,490 66.7% 21.8%

  • The bank's cost to income ratio went up marginally from 41% in 9mFY10 to 423% in 9mFY11 due to the additional hiring and expansion in franchise. The bank expects its cost to income ratio to stabilise at 42% in FY12.

  • 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 bank's fee income has grown by 9% YoY in 9mFY11. Nevertheless, it formed merely 5% of the bank's total income in 9mFY11. The fall in other income has been due to foreign exchange related losses and lower treasury gains.

  • While UBI has witnessed a 46% YoY increase in the absolute value of its gross NPAs over the last 12 months; primarily from the bank's restructured assets. The net NPAs have also moved up from 0.6% of total advances in 9mFY10 to 1.2% in 9mFY11. Having said that, the NPA coverage ratio stood at 70% at the end of December 2010. The same was 80% at the end of 9mFY10. The restructured assets that turned into NPAs in the last 6 months were to the tune of Rs 2.2 bn.

What to expect?
At the current price of Rs 324, the stock is valued at 1.1 times our estimated FY13 adjusted book value ( ResearchPro subscribers can view latest updates here). Despite sustenance of a healthy current and savings account mix and improvement in margins, the deterioration in asset quality, albeit temporary, is our prime concern about the bank. Further, 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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