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Union Bank: Not out of the woods yet - Views on News from Equitymaster
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Union Bank: Not out of the woods yet
Jun 3, 2015

Union Bank of India (UBI) declared its results for the fourth quarter (4QFY15) and full financial year 2014-2015. While the bank has reported 7.4% YoY growth in net interest income, net profits declined by 23.3% YoY. During the financial year 2014-15 (FY15), the profits were up marginally by 5% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) reported a growth of 7.4% YoY in 4QFY15 as advances grew by 5.6% YoY.
  • Other income rose sharply by 47.6% YoY during 4QFY15 driven by 21.3% growth in core fee income.
  • The cost-income ratio declined to 49.38% levels in 4QFY15 from 53.31% a year ago.
  • Provisioning costs for the quarter increased by 9.7% YoY.
  • Net NPAs move upwards from 2.33% in 4QFY14 to 2.71% in 4QFY15.
  • Net profit dipped by 23.3% YoY in 4QFY15 on account of higher tax expense.
  • Capital adequacy ratio stands at 10.22% at the end of 31st March 2015 as per Basel III norms.

Standalone Financial Performance Snapshot
Rs (m) 4QFY14 4QFY15 Change FY14 FY15 Change
Interest income 76,707 82,406 7.4% 293,494 320,840 9.3%
Interest expense 56,185 61,196 8.9% 214,701 236,401 10.1%
Net Interest Income 20,522 21,211 3.4% 78,793 84,439 7.2%
Other Income 7,743 11,431 47.6% 28,215 35,230 24.9%
Other Expense 15,067 16,118 7.0% 54,828 61,434 12.0%
Provisions and contingencies 9,205 10,099 9.7% 31,492 30,401 -3.5%
Profit before tax 3,993 6,423 60.9% 20,689 27,834 34.5%
Tax   (1,797) 1,986 NA 3,727 10,017 168.8%
Effective tax rate NA 30.9%   18.0% 36.0%  
Profit after tax/ (loss) 5,789 4,438 -23.3% 16,962 17,816 5.0%
Net profit margin (%) 7.5% 5.4%   5.8% 5.6%  
No. of shares (m)         635.8  
Book value per share (Rs)*         287.9  
P/BV (x)         0.6  
* (Book value as on 31 March, 2015)

What has driven performance in 4QFY15?
  • The growth in the topline was modest driven by 5.6% YoY increase in interest on advances and 11.8% YoY growth in income on investments. There was a sharp jump in other income driven by 21.3% YoY increase in core fee income. On account of tax expenses worth Rs 1,986 million in 4QFY15 as against net tax credit worth Rs 1,797 million, the bank's bottomline declined by 23.3% YoY. Moreover, deterioration in asset quality and high levels of slippages has continued to impact the financial health of Union Bank. We do not expect any strong development in credit quality too soon and hence we remain cautious on this front.

  • The top three sectors in terms of loan book exposure were Infrastructure (15.9%), retail advances (13.1%) and agriculture (13.1%).

  • The CASA deposits continue to remain subdued for Union Bank, reporting a muted growth of 5.5% YoY as on 31st March 2015. The growth in current deposits declined by 7.1% YoY during 4QFY15. The savings deposits reported a modest 9.9% YoY growth during the quarter. Therefore, the overall CASA share in total deposits (global + domestic) for the bank remained at tepid levels of 29.2% in 4QFY15. Overall, the deposit growth too remained subdued reporting tepid 6.5% YoY growth. It is worth noting that the share of high cost deposits in the total deposits declined from 12.6% in 4QFY14 to 5.8% in 4QFY15. The cost of funds for the domestic business declined from 6.83% in 4QFY14 to 6.74% in 4QFY15. For the global business, the cost of funds declined from 6.58% in 4QFY14 to 6.44% in 4QFY15.

  • However, the decline in the yields was higher than the decline in the cost of funds. As a result, domestic net interest margin (NIM) dropped to 2.46% in 4QFY15 from 2.62% in 4QFY14. In the global business, NIMs declined from 2.55% in 4QFY14 to 2.37% in 4QFY15.

  • The asset quality for Union bank continues to deteriorate and the bad loans have stood higher for the quarter. While slippages declined for second consecutive quarter, they were still higher by 28.9% YoY during 4QFY15. While traction in recoveries remains upbeat, bad loans continue to mount.

  • Subsequently, the return ratios for the bank stand depressed. Return on net worth (RONW) at 9.7% in 4QFY15 and return on assets (ROA) at 0.47% stand one of the lowest in the industry.

  • The bank has proposed a dividend of Rs 6 per share of face value Rs 10 for the financial year 2014-15. At the current stock price level, this translates into a dividend yield of 3.5%.
What to expect?

At the current stock price level, the stock is valued at 0.6 times its book value as on 31st March 2015.

Asset quality woes and cost inefficiencies continue to haunt Union Bank's earnings. 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 management continues to engage itself into clean up of the books and commits to maintain the earnings stability. However, the return ratios still remain on the lower side.

We had recommend investors to SELL the stock of Union Bank of India in June 2014. We maintain our stance and await quality improvement in bank's financials in order to turn positive.

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