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Union Bank: Setting realistic targets - Views on News from Equitymaster
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Union Bank: Setting realistic targets
Jul 25, 2008

Performance summary
  • Interest income grows by 20% YoY in 1QFY09 on the back of 18% YoY growth in advances.

  • Other income grows by 24% YoY in 1QFY09.

  • Net interest margin drops from 3.0% in 1QFY08 to 2.6% in 1QFY09.

  • Capital adequacy ratio at 12.2% at the end of 1QFY09.

  • Net NPA ratio improves from 0.7% to 0.2% in the last 12 months.



Rs (m) 1QFY08 1QFY09 Change
Interest income 21,111 25,332 20.0%
Interest Expense 13,399 17,232 28.6%
Net Interest Income 7,712 8,100 5.0%
NIM (%) 3.0% 2.6%  
Other Income 1,783 2,217 24.3%
Other Expense 4,241 4,157 -2.0%
Provisions and contingencies 1,554 2,957 90.3%
Profit before tax 3,700 3,203 -13.4%
Tax 1,450 920 -36.6%
Profit after tax / (loss) 2,250 2,283 1.5%
Net profit margin (%) 10.7% 9.0%  
No. of shares (m)   505.1  
Book value per share (Rs)*   111.3  
P/BV (x)   1.2  
* (Book value as on 31st March 2008)

What has driven performance in 1QFY09?
  • Although not overriding the growth of its peers, Union Bank of India (UBI) managed to hedge the slowdown in the growth of retail and agriculture segments by tapping the SME clients. While the bank’s SME portfolio has clocked a compounded annual growth rate of 30% over the last 4 years, on the back of it the total advances grew by 17.9% YoY in 1QFY09. However, the lack of pricing power in advances has taken a toll on the bank’s NIMs that have fallen by 40 basis points (0.4%) in the last 12 months. The bank has also set a target of growing advances and deposits by 22% YoY and 23% YoY respectively, enhancing its CASA proportion by 2% annually and is targeting NIM of 2.8% for FY09. We envisage that these targets are very realistic and well within the bank’s reach.

    Leveraging SME support
      1QFY08 % of total 1QFY09 % of total Change
    Advances 336,030   396,140   17.9%
    Corporate 68,450 20.4% 79,950 20.2% 16.8%
    Agriculture 109,290 32.5% 107,980 27.3% -1.2%
    Retail 68,670 20.4% 81,910 20.7% 19.3%
    SME 89,620 26.7% 126,300 31.9% 40.9%
               
    Deposits 869,813   1,072,480   23.3%
    CASA 289,648 33.3% 373,223 34.8% 28.9%
    Term deposits 580,166 66.7% 699,257 65.2% 20.5%

  • The bank’s cost to income ratio dropped from 44.6% in 1QFY08 to 40.3% in 1QFY09. Also, the bank has proactively fully provided for its AS15 requirement of Rs 3.5 bn in FY08 itself. Thus, it is unlikely to see any negative or one time cost surprises in the medium term. We expect this cost advantage to further improve the bank’s efficiency ratios. 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 has barely grown by 11.3% YoY in 1QFY09. The growth in other income in 1QFY09 has also been eroded by the losses on treasury portfolio. The bank had 67% of the investment in the held-to-maturity basket (HTM) at the end of 1QFY09.

  • While UBI has witnessed a 14.7% YoY reduction in the absolute value of its gross NPAs over the last 12 months; the net NPAs too have declined from 0.6% of total advances in 1QFY08 to 0.2% in 1QFY09. More importantly, the NPA coverage ratio stood at 93.1%at the end of 1QFY09.

What to expect?
At the current price of Rs 128, the stock is valued at 0.6 times our estimated FY11 adjusted book value. While the bank is currently comfortably placed in terms of capital adequacy and has sufficient room for perpetual debt and Tier II bonds to grow its business and for Basel II compliance (post Basel II CAR 11.6%), it may have to opt for dilution (rights issue) in the medium term. If the bank wishes to accelerate its advance growth or opts for inorganic growth, capital dilution will be necessary and the same will temporarily dilute shareholder returns.

Adequate capital, a high provisioning cover and reasonable consistency in asset quality makes it a de-risked play in the PSU banking space.

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