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Union Bank: FY14 profits 15% lower than estimates - Views on News from Equitymaster

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Union Bank: FY14 profits 15% lower than estimates
May 8, 2014

Union Bank of India (UBI) declared its results for the fourth quarter (4QFY13) and financial year 2013-2014. The bank has reported mere 3.7% YoY growth in net interest income and a 26.7% YoY decline in net profits. For the full year FY14, the profits decline by 21.4% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grows by mere 3.7% YoY in 4QFY14, on the back of 10.1% YoY growth in advances. Even FY14 reports meager 4.5% YoY growth in net interest income.
  • Provisioning costs for the quarter shoot up by 40.4% YoY during 4QFY14.
  • The cost-income ratio goes up to 53% levels in 4QFY14 from 41% a year ago.
  • Net NPAs move upwards from 1.6% in FY13 to 2.3% in FY14. Gross NPAs too stood on the higher side at 4.1% levels.
  • Net profit declines by 26.7% YoY in 4QFY14 on account of higher provisioning and weak interest income. For the full year FY14, the net profit declines by 21.4% YoY.
  • Capital adequacy ratio stands at 10.1% at the end of 31st March 2014 as per Basel III norms.
  • The company declares a dividend of Rs 4 per share (dividend yield: 2.9%).

Rs (m) 4QFY13 4QFY14 Change FY13 FY14 Change
Interest income 66,251 76,707 15.8% 251,247 293,494 16.8%
Interest expense 46,456 56,185 20.9% 175,819 214,701 22.1%
Net Interest Income 19,795 20,522 3.7% 75,428 78,793 4.5%
Other Income 8,755 7,743 -11.6% 25,520 28,215 10.6%
Other Expense 11,703 15,067 28.7% 45,122 54,828 21.5%
Provisions and contingencies 6,555 9,205 40.4% 25,184 31,492 25.0%
Profit before tax 10,291 3,993 -61.2% 30,643 20,689 -32.5%
Tax 2,397 -1,797 -175.0% 9,064 3,726 -58.9%
Effective tax rate 23.3% -45.0%   29.6% 18.0%  
Profit after tax/ (loss) 7,894 5,790 -26.7% 21,579 16,963 -21.4%
Net profit margin (%) 11.9% 7.5%   8.6% 5.8%  
No. of shares (m)         630.3  
Book value per share (Rs)*         269.5  
P/BV (x)         0.5  
* (Book value as on 31st March 2014)

What has driven performance in 4QFY14?
  • Asset quality woes continued to haunt the earnings performance for Union Bank and 4QFY14 witnessed a fall in profits. While the bank is putting its best foot forward by selling off bad loans to asset reconstruction companies (ARCs), credit concerns stay looming. More so because the loan recoveries have not been up to the mark and the provisions stand higher. These factors have depressed the earnings for the bank, dragging down the return ratios further. Therefore, the fact that it missed our estimated profit targets for full year FY14 is thus justifiable. Higher provisions and higher NPAs reported by the bank during the year have marred the bottom-line performance of the bank.

  • While the bank is cognizant about the credit quality pressures, 4QFY14 was also dedicated for clean-up of books and rebalancing the balance sheet of the bank. The bank continues to focus on the retail, agriculture and SME segments and these segments also proved to be the loan growth drivers for the quarter ended March 2014. While the overall loan book has grown 10.1% YoY. The MSME, agriculture and retail advances have grown by 31%, 27% and 27% respectively on YoY basis and continues to be the mainstay of the business for the bank. However, the CASA deposits for the year disappointed as the current deposits reported de-growth; whereas savings deposits reported a moderate YoY growth of 13%. As a result the CASA share for the bank fell to 29.5% in FY14 from 31% a year ago. The bank aims to lay thrust on growing savings deposits in the coming quarters.

    Share of low-cost deposits take a toll
    (Rs m) FY13 % of total FY14 % of total Change
    Advances 2,081,022   2,291,044   10.1%
    Deposits 2,637,620   2,976,750   12.9%
    CASA 816,350 31.0% 878,010 29.5% 7.6%
    Tem deposits 1,821,270 69.0% 2,098,740 70.5% 15.2%
    Credit deposit ratio 78.9%   77.0%    

  • The net interest income for the quarter has not been that encouraging. It grew by mere 3.7% YoY during 4QFY14, and 4.5% YoY for full year FY14. Interest costs that spiked up almost 22% YoY during 4QFY14 pulled down the spreads for the quarter. Consequently, the margins too have declined and were seen at 2.6% during 4QFY14, down from 2.9% same quarter a year ago. Also, lower yields reported during the quarter and lower share of CASA deposits have dragged the margins for the quarter.

  • The other income has showed up decent YoY growth during FY14 despite the weak credit scenario. Backed by existing loan processing fees, income from security receipts on sale of assets and treasury gains have helped beef up the non-interest income for the bank during FY14. However for the quarter 4QFY14, the other income has fallen by 11.6% YoY.

  • The operating costs for the bank have gone up 28.7% YoY for 4QFY14 and 21.5% YoY for full year FY14. Add-on wage increases and changes in mortality rates have led to higher employee expenses especially during 4QFY14. Not just that. Even non-operating expenses have stood higher due to leasing fees. Therefore, the cost-income ratio has jumped to 53% in 4QFY14 from 41% in 4QFY13.

  • The asset quality for Union bank has deteriorated considerably during the last quarter of FY14. The provisions for the fourth quarter of FY14 have spiked up 40.4% YoY and 25.0% YoY for full year. Higher provisions towards bad loans and restructured advances have weighed down on the profitability of the bank. Moreover, the gross NPAs have stood on the higher side at 4.1% levels. The net NPAs have moved upwards from 1.6% in FY13 to 2.3% in FY14. Two to three big accounts added to NPAs during 4QFY14. Furthermore, the bank aims to sell portfolio of Rs 4000 m to asset reconstruction companies as a part of the clean-up exercise. The restructured pipeline has stood at Rs 17 bn in FY14.

  • Subsequently, the profits for the bank have tumbled and were seen down 26.7% YoY during 4QFY14 and 21.4% down during full year FY14.

  • The capital adequacy ratio has stood at 10.1% at the end of 31st March 2014 as per Basel III norms. Furthermore, the bank has sufficient headroom to the extent of Rs 40 bn for raising additional Tier I capital.
What to expect?
At the current price of Rs 138, the stock is valued at 0.6 times our estimated FY16 adjusted book value.

Business consolidation and book clean-up exercise is expected to consume reasonable time-frame for the bank. In addition to that, meeting up the priority sector targets also stand looming. Therefore, margins pressures stand imminent.

The low return ratios and asset quality worries warrant a re-look at our estimates for 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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