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Union Bank: Provisions negate CASA benefits
May 14, 2011

Union Bank of India (UBI) declared its FY11 (financial year 2011) results. The bank has reported 24% YoY and 0.3% YoY growth in interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 48% YoY in FY11, on the back of 26% YoY growth in advances.
  • Other income grows by a marginal 3% YoY in FY11; however it increased by 22% for the fourth quarter (4QFY11) on account of higher treasury income and currency exchange rate gains.
  • NIMs (net interest margins) move up from 2.7% in FY10 to 3.3% in FY11 on increased lending yields and reduced fund costs.
  • Net NPAs move up from 0.81% in FY10 to 1.19% in FY11.
  • Net profit up marginally by 0.3% YoY in FY11 as provisions on advances eat into the profits.
  • Capital adequacy ratio comfortable at 12.95% at the end of FY11 as per Basel II.


 
Rs (m) 4QFY10 4QFY11 Change FY10 FY11 Change
Interest income 35,617 46,153 29.6% 133,027 164,526 23.7%
Interest expense 21,656 28,987 33.9% 91,103 102,364 12.4%
Net Interest Income 13,961 17,165 22.9% 41,924 62,162 48.3%
Net interest margin (%)       2.7% 3.3%  
Other Income 4,925 6,006 21.9% 19,747 20,388 3.2%
Other Expense 7,411 14,475 95.3% 25,078 39,500 57.5%
Provisions and contingencies/td> 3,400 1,533 -54.9% 8,264 13,496 63.3%
Profit before tax 8,075 7,163 -11.3% 28,329 29,554 4.3%
Tax 2,140 1,187   7,580 8,735  
Effective tax rate 26.5% 16.6%   26.8% 29.6%  
Profit after tax/ (loss) 5,935 5,976 0.7% 20,749 20,820 0.3%
Net profit margin (%) 16.7% 12.9%   15.6% 12.7%  
No. of shares (m)         524.3  
Book value per share (Rs)*       212.5  
P/BV (x)         1.5  
* (Book value as on 31st March 2011)

What has driven performance in FY11?
  • Union Bank of India (UBI) managed to enhance its share of low cost deposits to 32% in FY11 while growing its deposit base by 19% YoY, ahead of the sector average. The bank grew its advance book by 26% YoY in FY11, and improved its 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 which were impacted by the bulk deposit rates in FY10. Loan and deposit growth for FY11, were in line with our estimates. Going forward the bank estimates a 22% growth in advances and NIMs to fall marginally to around 3.2% in FY12.

    Retail advances drive growth...
    (Rs m) FY10 % of total FY11 % of total Change
    Advances 1,212,490   1,530,220   26.2%
    Agriculture 184,640 15.2% 210,460 13.8% 14.0%
    Retail 135,060 11.1% 162,380 10.6% 20.2%
    Home Loans 81,150 6.7% 92,110 6.0% 13.5%
    SME 226,850 18.7% 247,350 16.2% 9.0%
               
    Deposits 1,700,400   2,024,610   19.1%
    CASA 539,570 31.7% 643,070 31.8% 19.2%
    Tem deposits 1,160,830 68.3% 1,381,540 68.2% 19.0%
    Credit deposit ratio 71.3%   75.6%    

  • The bank's cost to income ratio went up marginally from 41% in FY10 to 48% in FY11 mainly due to the increase in provisioning on employee pension and gratuity. This totaled Rs 7.1 bn for the year. The bank expects its cost to income ratio to rationalize going forward.

  • UBI has a lot of catching up to do with its peers in fee income. The bank's fee income has grown by a mere 4% YoY in FY11. Nevertheless, it formed merely 11% of the bank's total income in FY11. The fall in other income has been due to lower treasury gains.

  • During the year bank has allotted 111 m perpetual non-cumulative preference shares to govt., carrying an annual floating coupon benchmarked to the repo rate with a spread of 1% (readjusted annually). It also allotted 19.2 m equity shares at a premium of Rs 344.9 each, to the government. This increased promoter's shareholding from 55.4% to 57.1%.

  • While UBI has witnessed a 36% 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 0.8% of total advances in FY10 to 1.2% in FY11. The restructured assets that turned into NPAs in the last 6 months were to the tune of Rs 5.3 bn. Provisioning coverage was at 67.6% for the year. Gross NPAs formed 2.4% of the gross banking credit at the end of FY11. The bank expects this to reduce to reduce to 1.9% at the end of March 2012.

What to expect?
At the current price of Rs 321, the stock is valued at 1.1 times our estimated FY13 adjusted book value ResearchPro subscribers can view latest updates here. The bank's performance has come in line of our broad asset growth estimates as well as profits. While we draw comfort from the bank's adequate capital and provisioning cover, the other income buffer has fallen short and incremental slippages are concerns with regard to the bank. The bank however plans to initiatives to increase grow advances in excess of 20% by FY12 as well as increase its franchise network of branches and ATMs. We shall soon review our forward estimates for the stock.

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