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Union Bank: Profits tank on higher provisions - Views on News from Equitymaster

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Union Bank: Profits tank on higher provisions
Jul 27, 2011

Union Bank of India (UBI) declared its results for the first quarter of financial year 2011-2012 (1QFY12). The bank has reported 33% YoY growth in interest income and 23% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 18% YoY in 1QFY12, on the back of 17% YoY growth in advances.
  • NIMs (net interest margins) move up marginally from 3.0% in 1QFY11 to 3.1% in 1QFY12 on increased lending yields.
  • Net NPAs move up from 0.94% in 1QFY11 to 1.32% in 1QFY12.
  • Net profit drops by 23% YoY in 1QFY12 as provisions on advances eat into the profits.
  • Capital adequacy ratio comfortable at 12.88% at the end of 1QFY12 as per Basel II.

Rs (m) 1QFY11 1QFY12 Change
Interest income 36,857 49,157 33.4%
Interest expense 23,376 33,255 42.3%
Net Interest Income 13,480 15,902 18.0%
Net interest margin (%) 3.0 3.1  
Other Income 4,350 4,840 11.3%
Other Expense 7,393 9,084 22.9%
Provisions and contingencies 1,973 4,284 117.2%
Profit before tax 8,464 7,374 -12.9%
Tax 2,450 2,730  
Effective tax rate 28.9% 37.0%  
Profit after tax/ (loss) 6,014 4,644 -22.8%
Net profit margin (%) 16.3% 9.4%  
No. of shares (m)   524.3  
Book value per share (Rs)*   222.0  
P/BV (x)   1.4  
* (Book value as on 30st June 2011)

What has driven performance in 1QFY12?
  • Union Bank of India's share of low cost deposits decreased marginally to 32% in 1QFY12 from 33% earlier while growing its deposit base by 16% YoY. The bank grew its advance book by 17% YoY in 1QFY12, and improved its net interest margins marginally on higher lending yields. However, growth saw a slowdown on account of the various rate hikes that the central bank has undertaken over the past few months. The higher proportion of CASA enabled the banks to get back to its long term average NIMs which were impacted by the bulk deposit rates in FY10. Going forward the bank estimates a 19% growth in advances for FY12; this is a revision versus its earlier expectation of a 22% growth in advances. We have been conservative in our estimates for the year, on account of the rising interest rate environment. The bank however expects to maintain its NIM at around 3.2% in FY12.
  • Balance sheet growth sees a slowdown...
    (Rs m) 1QFY11 % of total 1QFY12 % of total Change
    Advances 1,247,430   1,455,670   16.7%
    Deposits 1,714,840   1,991,780   16.1%
    CASA 558,450 32.6% 627,680 31.5% 12.4%
    Tem deposits 1,156,390 67.4% 1,364,100 68.5% 18.0%
    Credit deposit ratio 72.7%   73.1%    

  • The bank's cost to income ratio went up marginally from 41% in 1QFY11 to 44% in 1QFY12 mainly on HIGHER employee costs.

  • UBI has a lot of catching up to do with its peers in fee income. The bank's fee income has grown by a mere 11% YoY in 1QFY12, after a disappointing show in FY11. Nevertheless, it formed merely 10% of the bank's total income in 1QFY12. The fall in other income has been due to stagnant income from foreign exchange and profit on sale of investments.

  • Provisions saw an increase due to an increase in provision of Rs 2.1 bn on the RBI's revised norms for provisions on NPAs (Rs 1.9 bn) and restructured Assets Rs 290 m).

  • While UBI has witnessed a 37% YoY increase in the absolute value of its gross NPAs over the last 12 months, since 1QFY11; primarily from the bank's restructured assets. The net NPAs have also moved up from 0.9% of total advances in 1QFY11 to 1.3% in 1QFY12. Provisioning coverage increased to at 71.1% for the year. Gross NPAs formed 2.6% of the gross banking credit at the end of 1QFY12. The bank expects this to reduce to reduce to around 2% at the end of March 2012.

What to expect?
At the current price of Rs 302.3, the stock is valued at 1 times our estimated FY14 adjusted book value. The bank's performance this quarter was mainly marred by the one-time provisions the bank had to make based on the RBI's revised guidelines for provisioning. Thus from here on its performance is said to improve. The bank has also revised its estimates for loan and deposit growth, which we believe will help it focus more on its quality of assets rather than just balance sheet growth. Asset quality has seen some deterioration on account of shifting to the system based recognition of NPAs. However, this is expected to normalise over time. We have nonetheless been conservative in our estimates, and we reiterate our positive view on the stock.

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