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Union Bank: Provisions eat into profits
May 14, 2012

Union Bank of India (UBI) declared its FY12 (financial year 2012) results. The bank has reported a 29% YoY growth in interest income and a 14% YoY decline in net profits. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 11% YoY in FY12, on the back of 18% YoY growth in advances.
  • Other income grows by 14% YoY in FY12; however it increased by 26% for the fourth quarter (4QFY11) on account of higher core income growth and recovery in written off accounts.
  • NIMs (net interest margins) move marginally lower from 3.3% in FY11 to 3.2% in FY11 on increased lending yields and despite higher fund costs.
  • Net NPAs move up from 1.19% in FY11 to 1.70% in FY12.
  • Net profit falls by 14% YoY in FY12 as higher provisions on advances eat into the profits.
  • Capital adequacy ratio comfortable at 11.85% at the end of FY12 as per Basel II.
  • The bank declares a dividend of Rs 8 per share, implying a dividend yield of 4%.

Rs (m) 4QFY11 4QFY12 Change FY11 FY12 Change
Interest income 46,153 57,434 24.4% 164,526 211,443 28.5%
Interest expense 28,987 38,668 33.4% 102,364 142,354 39.1%
Net Interest Income 17,165 18,766 9.3% 62,162 69,089 11.1%
Net interest margin (%)       3.3% 3.2%  
Other Income 6,006 7,554 25.8% 20,388 23,324 14.4%
Other Expense 14,475 10,332 -28.6% 39,500 39,875 1.0%
Provisions and contingencies 1,533 5,172 237.4% 13,496 25,410 88.3%
Profit before tax 7,163 10,816 51.0% 29,554 27,128 -8.2%
Tax 1,187 3,085 159.8% 8,735 9,256 6.0%
Effective tax rate 16.6% 28.5%   29.6% 34.1%  
Profit after tax/ (loss) 5,976 7,732 29.4% 20,820 17,871 -14.2%
Net profit margin (%) 12.9% 13.5%   12.7% 8.5%  
No. of shares (m)         550.5  
Book value per share (Rs)*         260.4  
P/BV (x)         0.8  
* (Book value as on 31st March 2012)

What has driven performance in FY12?
  • Union Bank of India (UBI) managed to maintain its share of low cost deposits at around 31% in FY12 while growing its deposit base by 10% YoY, lower than the sector average. The bank added around 2.8 m CASA accounts during the year. The bank grew its advance book by 18% YoY in FY12, ahead of the RBI's 16% target for credit growth during the year. The bank has able to maintain its margin at 3.2% for the year in line with its guidance. Union Banks was one of the first banks to actually cut its base lending rate by 0.1% from 10.75% to 10.65% per annum with effect from December 26, 2011 and then further decreased the same to 10.5%, post the repo cut by the Reserve Bank of India (RBI).

  • Advance growth for the bank came in slightly higher than our conservative estimates; however deposit growth has not been satisfactory with customers preferring to park their funds in higher yielding assets. This caused the credit/deposit ratio to increase to 81% from 75.6% in FY11. For FY13, the bank is planning deposits growth of around 17%. In terms of its loan book, UNBK is planning for 19% growth. This is pretty much in line with RBI projections for the current financial year.

    CASA growth slows...
    (Rs m) FY11 % of total FY12 % of total Change
    Advances 1,530,220   1,810,310   18.3%
    Retail 162,380 10.6% 162,420 9.0% 0.0%
    Home Loans 92,110 6.0% 105,118 5.8% 14.1%
    MSME 247,350 16.2% 246,620 13.6% -0.3%
               
    Deposits 2,024,610   2,228,690   10.1%
    CASA 643,070 31.8% 697,050 31.3% 8.4%
    Tem deposits 1,381,540 68.2% 1,531,640 68.7% 10.9%
    Credit deposit ratio 75.6%   81.2%    

  • The bank's cost to income ratio went down from 48% FY11 to 43% in FY12 on a rationalization of operating costs.

  • UBI has improved its performance on the fee income front. The bank's fee income has grown by 12% YoY in FY12. Nevertheless, it formed merely 14% of the bank's total income in FY12. Strong recovery in written off accounts helped propel other income by 14.4% YoY in FY12 and by 26% YoY in 4QFY12.

  • Provisions saw an increase on account of higher provisions for restructured accounts which amounted to Rs 5 bn versus a mere Rs 20 m in FY11. This severely dented profits for the year, which was down by 14% YoY. However, this was somewhat of a recovery from the performance in the 9 month period, where profits we down 32% on a YoY basis. Some of the loans that were restructured continued to remain as standard assets. However, the provisioning requirement for such standard assets is five times higher (at 2%) than normal ones (0.4%). Last quarter GTL helped contribute to a significant portion of the restructuring. This quarter the Rajasthan State Electricity Board (SEB) was restructured amounting to Rs 18 bn. The power sector accounted for nearly Rs 18 bn of the Rs 32.4 bn worth loans of restructured during the 4QFY12. As far as the restructuring pipeline is concerned some more main is expected in 1QFY13 from more SEBs (Uttar Pradesh) for Rs 10-11 bn and other smaller accounts. Union Bank is one of the few banks that does not have aviation exposure, which greatly increased NPA and restructuring levels of other banks.

  • UBI has witnessed a whopping 50% YoY increase in the absolute value of its gross NPAs over the last 12 months,. The increase has mainly come in from the migration of smaller accounts to the system. Thus, as of now the bank has completely moved all its accounts onto the system, thus further surprises on the NPA front may come at a lower intensity. Net NPAs have also moved up from 1.2% of total advances in FY11 to 1.7% in FY12 however this has improved from the 1HFY12 levels of over 2%. Thus, a strong focus to arrest slippages and recoveries has helped improve the NPA trend. Provisioning coverage however declined to 62.2% from 63.1% previously. Gross NPAs formed 3% of the gross banking credit at the end of FY12 from 2.4% at the end of FY11. The bank expects this to start coming down soon with more efforts put into recovery.

  • During the year bank has allotted 26.2 m equity shares to Life Insurance Corporation of India on preferential basis, amounting to Rs 6.5 bn. Post this capital infusion, the government stake in the bank came down to 54.35% from 57.07% earlier. Union Bank's capital adequacy ratio (CAR) stands comfortable at 11.85% at the end of FY12 as per Basel II with a Tier 1 capital ratio of 8.4%.

What to expect?
At the current price of Rs 206.5, the stock is valued at 0.9 times our estimated FY14 adjusted book value. The bank's performance this quarter was mainly marred by the increase in NPA provisioning on account of a sharp increase in its restructured asset book. But what worries us is the bank's 15.7% exposure to the infra space and further restructurings are expected in the power space. This may further depress profits in the coming quarters. The bank 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. The bank plans to focus on loan recovery going forward, which has seen traction so far this year. We have been conservative in our estimates on loan growth and asset quality. However we may need to factor in further restructuring in FY13. We continue to maintain out positive 'BUY' view on the stock. This is provided that investors' exposure to the stock is less than 2 to 3% of overall portfolio. Also do keep track of the bank's quarterly performance on the asset quality front.

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