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Union Bank: Treasury takes the cake - Views on News from Equitymaster

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Union Bank: Treasury takes the cake
Jul 24, 2009

Performance summary
  • Interest income grows by 26% YoY in 1QFY10 on the back of 27% YoY growth in advances.
  • Other income records robust growth of 118% YoY in 1QFY10 backed by treasury gains.
  • Net interest margin drops to 2.3% in 1QFY10 due to lower CASA.
  • Capital adequacy ratio at 13.7% as per Basel II at the end of 1QFY10 (12.2% in 1QFY09).
  • Gross NPA ratio improves from 2.1% to 2.0%, however net NPAs increase to 0.7% as against 0.2% in 1QFY09.


(Rs (m) 1QFY09 1QFY10 Change
Interest income 25,123 31,753 26.4%
Interest Expense 17,232 23,737 37.7%
Net Interest Income 7,891 8,016 1.6%
NIM (%) 3.4% 2.3%  
Other Income 2,426 5,287 117.9%
Other Expense 4,157 5,429 30.6%
Provisions and contingencies 2,957 1,903 -35.6%
Profit before tax 3,203 5,971 86.4%
Tax 920 1,550 68.5%
Profit after tax / (loss) 2,283 4,421 93.6%
Net profit margin (%) 9.1% 13.9%  
No. of shares (m)   505.1  
Book value per share (Rs)*   147.0  
P/BV (x)      
* (Book value as on 30th June 2009)

What has driven performance in 1QFY10?
  • After rounding off the previous fiscal (FY09), which was otherwise a stressful year for the banking sector, with commendable performance, Union Bank of India (UBI) has shown some signs of stress this quarter. While the growth in advances and deposits are appreciable at 27% YoY and 34% YoY respectively, the bank has shed its superior margin profile. Re-pricing of loans and higher cost of funds has eroded UBI’s NIMs by 1.1% in the past twelve months. As per the latest RBI data, while the average level of CASA with PSU banks dropped from 40% in FY06 to 32% in FY09, in the case of UBI the drop was from 33% to 30% respectively. With a large part of the high cost term deposits maturing later this fiscal, UBI expects an improvement in its NIMs.

    Business sustains momentum
      1QFY09 % of total 1QFY10 % of total Change
    Advances 758,080   960,260   26.7%
    Agri + Large corp. 549,870 72.5% 699,210 72.8% 27.2%
    Retail 81,910 10.8% 105,720 11.0% 29.1%
    SME 126,300 16.7% 155,330 16.2% 23.0%
    Deposits 1,072,518   1,438,890   34.2%
    CASA 372,800 34.8% 437,420 30.4% 17.3%
    Term deposits 699,718 65.2% 1,001,470 69.6% 43.1%

  • Stress was also seen in terms of NPA levels as the bank wrote back some of its NPA provisioning and as a result the net NPAs were higher at 0.7% in 1QFY10 as against 0.2% in 1QFY09. However, the incremental delinquency was 20%. Also gross NPA to advances ratio improved from 2.1% to 2.0% due to faster growth in advances.

  • The bank’s cost to income ratio increased from 40% in 1QFY09 to 41% in 1QFY10. 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. 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 although grew 43% YoY formed merely 21% of the bank’s total income in 1QFY10 (14% in 1QFY09). The growth in other income has largely been due to treasury gains that multiplied 6 times and comprised 40% of the bank’s other income in 1QFY10.

What to expect?
What to expect? At the current price of Rs 242, the stock is valued at 1.1 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 1.75% by the end of FY10. It is also targeting CASA level of 35% by FY12. 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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