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Union Bank: Profits up on improved quality

Feb 5, 2013

Union Bank of India (UBI) declared its results for the third quarter of financial year 2012-2013 (3QFY13). The bank has reported 19% YoY growth in interest income and a 54% YoY growth in net profits. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 18.9% YoY in 3QFY12, on the back of 21.6% YoY growth in advances.
  • NIMs (net interest margins) move down marginally from 3.2% in 9mFY12 to 3% in 9mFY13 on lower lending yields.
  • Net NPAs move down appreciably from 2.06% in 1HFY13 to 1.7% in 9mFY13. It is also lower than the 1.88% levels seen in 9mFY12.
  • Net profit rises by 54% YoY in 3QFY13 on account of lower provisioning; it increased by around 35% in 9mFY13.
  • Capital adequacy ratio stands at 10.78% at the end of 3QFY13 as per Basel II.

Rs (m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
Interest income 53,148 63,199 18.9% 153,409 184,996 20.6%
Interest expense 35,939 44,284 23.2% 103,686 129,362 24.8%
Net Interest Income 17,209 18,915 9.9% 49,724 55,634 11.9%
Net interest margin (%)       3.2 3.0  
Other Income 6,521 6,395 -1.9% 16,369 16,766 2.4%
Other Expense 10,889 11,726 7.7% 29,543 33,419 13.1%
Provisions and contingencies 9,727 8,573 -11.9% 20,239 18,629 -8.0%
Profit before tax 3,114 5,010 60.9% 16,311 20,352 24.8%
Tax 1,144 1,986 73.6% 6,172 6,666 8.0%
Effective tax rate 36.7% 39.6%   37.8% 32.8%  
Profit after tax/ (loss) 1,970 3,024 53.5% 10,139 13,686 35.0%
Net profit margin (%) 3.7% 4.8%   6.6% 7.4%  
No. of shares (m)         550.5  
Book value per share (Rs)*         262.4  
P/BV (x)         0.9  
* (Book value as on 31st December 2012)

What has driven the performance in 9mFY13?
  • Union Bank of India's share of low cost deposits (CASA) decreased marginally to 31.3% in 9mFY13 from 32.5% earlier while growing its deposit base by 17% YoY, which is slightly ahead of the industry average. The bank consciously shed high cost deposits in order to protect margins. It also opened over 3.93 million CASA accounts over the past 9 months. The bank grew its advance book by 21.6% YoY in 9mFY13, and its net interest margins declined on account of lower lending yields. Union Bank cut its base lending rate by 0.25% to 10.25% post the monetary policy easing announcement by the Reserve Bank of India (RBI).

  • Advance growth has seen an increase of 21.6% YoY with retail advances seeing a 15% YoY growth and agriculture advances seeing an 18% YoY growth. The bank's NIMs dropped to around 3% in 9mFY13 as against 3.2% earlier. In 3QFY13 NIMs were 2.95% showing some pressure on the same on account of lower lending yields in certain buckets and with monetary easing it may see some further pressure.

    Advances see robust growth...
    (Rs m) 9mFY12 % of total 9mFY13 % of total Change
    Advances 1,562,020   1,899,970   21.6%
    Deposits 2,053,170   2,393,550   16.6%
    CASA 668,100 32.5% 748,010 31.3% 12.0%
    Tem deposits 1,385,070 67.5% 1,645,540 68.7% 18.8%
    Credit deposit ratio 76.1%   79.4%    

  • The bank's cost to income ratio went up marginally from 45% in 9mFY12 to 46% in 9mFY13 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 6% YoY in 9mFY13. Plus, it formed merely 14% of the bank's total income in 9mFY13. The benign increase in other income has been due to lower profit on sale of investments and treasury income, however recoveries have increased, and the bank earned higher income on foreign exchange.

  • Provisions saw a decrease on account of lower provisions for restructured accounts and investment depreciation. The bank saw a total restructuring of 197 accounts totaling Rs 12 bn (0.6% of advances) during the quarter, with Rs 7.2 bn being restructured in the large corporate space. Restructuring was mainly seen in the steel, chemicals and hotel industry space. The pipeline of restructuring continues to exist with further restructuring expected next quarter. Cumulative restructured assets form 5.6% of the overall loan book.

  • UBI saw a 26% YoY increase in the absolute value of its gross NPAs over the last 12 months, since 3QFY12. However, on increased recovery efforts and write-offs, the net NPAs moved lower from 1.88% of total advances in 9mFY12 to 1.70% in 9mFY13, and this has also improved from the 1HFY13 levels of over 2% on account of lower slippages. What was also encouraging was that provisioning coverage improved to 66.2% for 9mFY13, from 63.1% previously. Gross NPAs formed 3.36% of the gross banking credit at the end of 9mFY13 from 3.33% at the end of 9mFY12. The bank expects this to reduce to less than 3% at the end of March 2013. It expects NPAs to start coming down with more efforts on loan recovery.

  • The bank's capital adequacy ratio currently stands at a worrying level of 10.78% as per Basel II norms, with Tier 1 capital at 7.4%. The bank has asked for a capital infusion to the tune of Rs 2.5 bn from the government which can either take place with a rights issue, a preferential placement, or a QIP.

What to expect?
At the current price of Rs 239, the stock is valued at 1 time our estimated FY15 adjusted book value. The bank's performance this quarter was boosted by improved asset quality versus what was seen in previous quarters. The bank's management has strongly focused on improving asset quality and this had reaped benefits. Nevertheless, one cannot sideline the pipeline of restructuring which may accrue in the next quarter. With the RBI's new draft guidelines on increasing provisions on the restructured assets to 5% by FY15 from 2.75% currently, bottomline of the bank may take a hit. UBI expects to grow its deposits and advances in line with the RBI projections for FY13, however this may be in the lower yielding priority sector lending space, which may not do much for margins. We recommend a Hold on the stock on account of the recent run up in prices.

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