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Union Bank: Lower provisions aid profits
Feb 25, 2014

Union Bank of India (UBI) declared its results for the third quarter of financial year 2013-2014 (3QFY14). The bank has reported 3.8% YoY growth in net interest income and the profits have grown by 15.4% YoY during 3QFY14. However, the profits for 9mFY14 have also dropped by 18.4% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grows by mere 3.8% YoY in 3QFY14, on the back of 19.9% YoY growth in advances.
  • NIMs (net interest margins) decline to 2.6% in 9mFY14 from 3.0% in 9mFY13.
  • Net NPAs have inched upwards to 2.3% in 3QFY14 from 1.7% in 3QFY13. Gross NPAs also stood higher at 3.9% levels vis-à-vis 3.4% same quarter previous year.
  • Net profit grows by 15.4% YoY in 3QFY14 on the back of lower provisions. However, for the 9mFY14 period, the profits declined by 18.4% YoY.
  • Capital adequacy ratio stands at 10.12% at the end of 31st December 2013 as per Basel III norms.

Standalone Earnings performance
Rs (m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Interest income 63,199 75,503 19.5% 184,996 216,787 17.2%
Interest expense 44,284 55,868 26.2% 129,362 158,516 22.5%
Net Interest Income 18,915 19,635 3.8% 55,634 58,271 4.7%
Net interest margin (%)       3.0% 2.6%  
Other Income 6,395 6,799 6.3% 16,766 20,473 22.1%
Other Expense 11,726 13,818 17.8% 33,419 39,761 19.0%
Provisions and contingencies 8,573 6,104 -28.8% 18,629 22,287 19.6%
Profit before tax 5,010 6,512 30.0% 20,352 16,696 -18.0%
Tax 1,986 3,023 52.2% 6,666 5,524 -17.1%
Effective tax rate 39.6% 46.4%   32.8% 33.1%  
Profit after tax/ (loss) 3,024 3,489 15.4% 13,686 11,173 -18.4%
Net profit margin (%) 4.8% 4.6%   7.4% 5.2%  
No. of shares (m)         741.3  
Book value per share (Rs)*         278.4  
P/BV (x)         0.4  
* (Book value as on 31st December 2013)

What has driven performance in 3QFY14?
  • Defying macro challenges, the business growth continues to stay robust for Union Bank of India. The advances for the quarter grew 19.9% YoY, while the deposits reported 19.1% YoY growth during 3QFY14. The loan growth was primarily driven by robust growth in MSME (29.5% YoY), retail advances (28.1% YoY) and agriculture (18.7% YoY). The housing loan portfolio that grew healthy 60.4% YoY boosted the retail loan book.

    Both Advances and Deposits witness robust growth…
    (Rs m) 3QFY13 % of total 3QFY14 % of total Change
    Advances 1,899,970   2,277,450   19.9%
    Agriculture 210,460 11.1% 210,460 9.2% 0.0%
    Retail 153,190 8.1% 153,190 6.7% 0.0%
    Home Loans 94,227 5.0% 94,227 4.1% 0.0%
    SME 247,350 13.0% 247,350 10.9% 0.0%
    Deposits 2,393,550   2,851,250   19.1%
    CASA 748,010 31.3% 821,120 28.8% 9.8%
    Tem deposits 1,645,540 68.7% 2,030,130 71.2% 23.4%
    Credit deposit ratio 79.4%   79.9%    

  • The deposits for the quarter grew strong 19.1% YoY. That's because the term deposits soared 23.4% YoY. However, the CASA base stood weaker and grew at modest 9.8% YoY. The higher bulk deposit base restricted the CASA traction for the bank.

  • The NII growth performance, however, stood weak for the quarter on account of steep rise in interest expenditure during the quarter. The NII reported mere 3.8% growth YoY due to higher interest expenses that jumped 26.2% YoY. The higher proportion of high cost deposit base also added to the increased interest expenses for the bank during 3QFY14. Higher interest expenditure and falling low-cost deposit base dragged the margins for the bank. While the cost of funds have gone up, the yields on assets have come down YoY. Therefore, NIMs at the end of 9mFY14 were recorded at 2.6%, down from 3.0% for the corresponding period a year ago.

  • The other income reported a modest growth of 6.3% YoY during 3QFY14 backed by healthy traction in treasury income and investment gains reported during the quarter.

  • However, the operating costs for the bank stood higher and increased 17.8% YoY during 3QFY14. As a result, the cost-income ratio shot up to 52% in 3QFY14 as against 46% same period a year ago.

  • The provisions for the quarter stood lower. However, the gross NPAs for the bank moved up to 3.9% during 3QFY14 from 3.4% in 3QFY13. Also, the net NPAs have jumped from 1.7% in 3QFY13 to higher levels of 2.3% in 3QFY14. The recoveries halved during the quarter and the provision coverage ratio stood at 60%. Agri and MSME have contributed to the higher NPAs during the quarter. The outstanding restructured book for the quarter stood at Rs 144.8 bn.

  • While the lower provisioning costs supported the earnings traction during 3QFY14, and the profits reported 15.4% YoY growth.

  • The capital adequacy for the bank stood at 10.12% as per BASEL III norms as at the end of December 2013.
What to expect?
At the current price of Rs 102, the stock is valued at 0.4 times our estimated FY16 adjusted book value.

With the management confident to curtail slippages and report improvement in asset quality, the pressures still stand looming. That said, we are sanguine about the concerted efforts of the management to clean up the books and maintain the earnings stability. However, the return ratios still remain on the lower side. Moreover, the pressures on margins and operating costs also remain. Therefore, it will be little early to say that the worst is over for Union Bank.

Asset quality worries and the rather lower return ratios prompt us to maintain a Hold recommendation on the stock. We recommend investors to wait and watch the shaping up of asset quality in the future before acting on the attractive valuations.

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