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Union Bank: Investing for future - Views on News from Equitymaster
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Union Bank: Investing for future
May 7, 2009

Performance summary
  • Interest income grows by 29% YoY in FY09 on the back of 28% YoY growth in advances.
  • Other income growth remains muted in FY09 despite support of treasury income.
  • Net interest margin improves to 3.2% in FY09 from 2.9% in FY08.
  • Capital adequacy ratio at 13.3% as per Basel II at the end of FY09 (11.7% in FY08).
  • Gross NPA ratio improves from 2.2% to 2.0%, net NPAs at 0.3% in FY09 as against 0.2% in FY08.
  • Declared dividend of Rs 5 per share (dividend yield 3.1%).


Rs (m) 4QFY08 4QFY09 Change FY08 FY09 Change
Interest income 25,399 32,897 29.5% 92,146 118,894 29.0%
Interest Expense 17,685 23,633 33.6% 63,609 80,758 27.0%
Net Interest Income 7,714 9,264 20.1% 28,537 38,136 33.6%
NIM (%) 2.9% 3.2%
Other Income 3,731 5,590 49.8% 13,196 14,826 12.4%
Other Expense 2,539 5,740 126.1% 15,930 22,141 39.0%
Provisions and contingencies 3,652 2,834 -22.4% 7,289 7,375 1.2%
Profit before tax 5,254 6,280 19.5% 18,514 23,446 26.6%
Tax 44 1,630 3604.5% 4,644 6,180 33.1%
Profit after tax / (loss) 5,210 4,650 -10.7% 13,870 17,266 24.5%
Net profit margin (%) 20.5% 14.1% 15.1% 14.5%
No. of shares (m) 505.1 505.1
Book value per share (Rs)* 137.9
P/BV (x) 1.2
* (Book value as on 31st March 2009)

What has driven performance in FY09?
  • Rounding off FY09 with a commendable performance, Union Bank of India (UBI) managed to balance growth across all the parameters without showing any stress. While the growth in advances and deposits were higher than our estimates of 18% YoY and 20% YoY respectively, ability to sustain spreads has also helped the bank improve its NIMs by 0.3%. It may be recalled that the bank had set a target of growing advances and deposits by 22% YoY and 23% YoY respectively, while targeting NIM of 2.8% for FY09. Each of these has been surpassed. Although the CASA proportion has fallen this fiscal, UBI sees the same going back to 35% levels by FY12.

    Business sustains momentum
    FY08 % of total FY09 % of total Change
    Advances 758,745   969,600   27.8%
    Agri + Large corp. 557,965 73.5% 707,190 72.9% 26.7%
    Retail 78,360 10.3% 100,920 10.4% 28.8%
    SME 122,420 16.1% 161,490 16.7% 31.9%
    Deposits 1,038,590   1,384,160   33.3%
    CASA 362,040 34.9% 417,110 30.1% 15.2%
    Term deposits 676,550 65.1% 967,050 69.9% 42.9%

  • The bank’s cost to income ratio increased from 38% in FY08 to 42% in FY09. The bank has cited that besides the provision for wage arrears and brand building expenses, it has also invested in setting up 196 branches and recruiting and training more than 24,000 employees this fiscal. The bank expects its cost to income ratio to stabilise at 41% by FY10 (one of the lowest in the banking sector).

  • UBI has a lot of catching up to do with its peers in fee income, which forms merely 19% of the bank’s total income. The growth in other income has also been very marginal as the bank had 67% of the investment in the held-to-maturity basket (HTM) at the end of FY09.

  • While UBI has witnessed a reduction in its gross NPAs over the last 12 months (from 2.2% to 2.0%); the net NPAs increased from 0.2% of total advances in FY08 to 0.3% in FY09. Nevertheless, this stands as being the lowest amongst PSU banks. The NPA coverage ratio stood at 83% at the end of FY09 (93% in FY08). The bank restructured assets worth Rs 30 bn (more than 1 lac accounts) in FY09.

What to expect?
At the current price of Rs 159, the stock is valued at 0.7 times our estimated FY11 adjusted book value. UBI is targeting advance and deposit growth of 23% and 25% respectively while it sees gross NPA coming down to 1.5% in FY10. The bank is currently comfortably placed in terms of capital adequacy to grow its business. Further, a reasonable provisioning cover and consistency in asset quality makes it a de-risked play in the PSU banking space. We reiterate our positive view on the stock.

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