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Union Bank: Margins move back to normalcy - Views on News from Equitymaster

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Union Bank: Margins move back to normalcy
Jul 27, 2010

Union Bank of India declared its 1QFY11 results. The bank has reported a 65% YoY and 36% YoY growth in net interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Interest income grows by 16% YoY in 1QFY11 on the back of 30% YoY growth in advances.
  • Other income falls by 15% YoY due to lower treasury income.
  • Net interest margin improves from 2.3% in 1QFY10 to 3% in 1QFY11 due to re-pricing of assets
  • Capital adequacy ratio at 12.6% as per Basel II at the end of 1QFY11.
  • Net NPA ratio higher at 0.9% in 1QFY11 from 0.7% in 1QFY10.


Rs (m) 1QFY10 1QFY11 Change
Interest income 31,908 36,857 15.5%
Interest Expense 23,736 23,376 -1.5%
Net Interest Income 8,172 13,481 65.0%
NIM (%) 2.3% 3.0%  
Other Income 5,132 4,350 -15.2%
Other Expense 5,429 7,393 36.2%
Provisions and contingencies 1,903 1,973 3.7%
Profit before tax 5,972 8,465 41.7%
Tax 1,550 2,450 58.1%
Profit after tax / (loss) 4,422 6,015 36.0%
Net profit margin (%) 13.9% 16.3%  
No. of shares (m) 505.1 505.1  
Book value per share (Rs)*   185.2  
P/BV (x)   1.7  
* (Book value as on 30th June 2010

What has driven performance in 1QFY11?
  • While managing to improve its share of low cost deposits to 33%, Union Bank of India (UBI) showed robust growth in advances in the first quarter of FY11. UBI grew its advance book by 30% YoY in 1QFY11, without sacrificing on margins. In order to hedge the slowdown in the growth of retail and agriculture segments, the bank tapped SME clients. The higher proportion of CASA enabled the banks to get back to its long term average NIMs that were impacted by the bulk deposit rates in FY10. While the bank had to pass on lower interest rates to loan customers, the high cost bulk deposits in its books kept its interest costs relatively high during FY10. Going forward the bank estimates 25% growth in advances and NIMs in the range of 2.8% to 3% for FY11.
    Leveraging SME support
      1QFY10 % of total 1QFY11 % of total Change
    Advances 960,260   1,247,430   29.9%
    Corporate 550,200 57.3% 695,760 55.8% 26.5%
    Agriculture 149,190 15.5% 186,050 14.9% 24.7%
    Retail 105,540 11.0% 143,590 11.5% 36.1%
    SME 155,330 16.2% 222,030 17.8% 42.9%
    Deposits 1,438,890   1,714,840   19.2%
    CASA 437,420 30.4% 558,450 32.6% 27.7%
    Term deposits 1,001,470 69.6% 1,156,390 67.4% 15.5%

  • The bankís cost to income ratio dropped marginally from 42% in 1QFY10 to 41% in 1QFY11 due to the base effect of provision for wage arrears and brand building expenses in the corresponding quarter of FY10. We expect this cost advantage to further improve the bankís efficiency ratios. The bank expects its cost to income ratio to stabilise at 41% in FY11.

  • Although UBI does have a lot of catching up to do with its peers in fee income, the same have shown signs of improvement over the past few quarters. The bankís fee income has grown by 23% YoY in 1QFY11. Nevertheless, it formed merely 5% of the bankís total income in 1QFY11. The fall in other income has been due to foreign exchange related losses and lower treasury gains.

  • While UBI has witnessed a 46% YoY increase in the absolute value of its gross NPAs over the last 12 months; primarily from the bankís restructured assets. The net NPAs have also moved up from 0.7% of total advances in 1QFY10 to 0.9% in 1QFY11. Having said that, the NPA coverage ratio stood at 71% at the end of June 2010, marginally above the RBIís mandate of 70%. The same was 93% at the end of 1QFY10.

What to expect?
At the current price of Rs 323, the stock is valued at 1.1 times our estimated FY13 adjusted book value (ResearchPro subscribers can view latest updates here). Despite sustenance of a healthy current and savings account mix and improvement in margins, the deterioration in asset quality, albeit temporary, is our prime concern about the bank. Further, excessive reliance on treasury income may prove to be risky. Having said that, most of the near term risks already seem to be priced in and we continue to retain our positive view on the stock.

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