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Union Bank: Other income stays flat
Jul 28, 2012

Union Bank of India (UBI) declared its results for the first quarter of financial year 2012-2013 (1QFY13). The bank has reported 23.5% YoY growth in interest income and 10% YoY rise in net profits. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 23.5% YoY in 1QFY13, on the back of 19.5% YoY growth in advances.
  • NIMs (net interest margins) move down marginally from 3.1% in 1QFY12 to 3% in 1QFY13.
  • Net NPAs move up from 1.32% in 1QFY12 to 2.2% in 1QFY13.
  • Net profit increases by 10% YoY in 1QFY13 on benign growth in other income as well as higher provisions.
  • Capital adequacy ratio comfortable at 11.6% at the end of 1QFY13 as per Basel II

Rs (m) 1QFY12 1QFY13 Change
Interest income 49,157 60,699 23.5%
Interest expense 33,255 42,482 27.7%
Net Interest Income 15,902 18,217 14.6%
Net interest margin (%) 3.1 3.0  
Other Income 4,840 4,912 1.5%
Other Expense 9,084 10,459 15.1%
Provisions and contingencies 4,284 5,185 21.0%
Profit before tax 7,374 7,486 1.5%
Tax 2,730 2,370 -13.2%
Effective tax rate 37.0% 31.7%  
Profit after tax/ (loss) 4,644 5,116 10.2%
Net profit margin (%) 9.4% 8.4%  
No. of shares (m)   550.5  
Book value per share (Rs)*   246.8  
P/BV (x)   0.7  
* (Book value as on 30st June 2012)

What has driven performance in 1QFY13?
  • Union Bank of India's share of low cost deposits decreased to 31% in 1QFY13 from 21% earlier while growing its deposit base at a slow pace of 11.5% YoY. The bank grew its advance book by an appreciable 19.5% YoY in 1QFY13. However its net interest margins dropped marginally on higher costs of funds. On account of muted deposit growth the credit/deposit ratio increased to 78.3% from 73.1% in 1QFY12.The bank expects advance growth to come in at 18-20% and deposit growth at around 17%; however we have been slightly more conservative in our estimates. The management reiterated that the current economic environment has a lot of challenges and is not very conducive. The bank has decided to not extend unsecured credit and go slow on short term corporate loans.

    Deposit growth continues to lag...
    (Rs m) 1QFY12 % of total 1QFY13 % of total Change
    Advances 1,455,670   1,739,110   19.5%
    Deposits 1,991,780   2,221,100   11.5%
    CASA 627,680 31.5% 687,420 30.9% 9.5%
    Tem deposits 1,364,100 68.5% 1,533,680 69.1% 12.4%
    Credit deposit ratio 73.1%   78.3%    

  • The bank's cost to income ratio went up from 44% in 1QFY12 to 45% in 1QFY13 mainly on higher employee costs.

  • UBI has improved its performance on the fee income front. The bank's fee income grew by 17% YoY in 1QFY13. Nevertheless, it formed merely 13% of the bank's total income in 1QFY13. The flat growth in other income has been due to treasury losses and lower recovery from written off accounts.

  • Provisions saw an increase due to an increase in NPA provisioning, investment depreciation Rs 490 m and restructured assets provisioning (Rs 700 m). Eleven accounts worth Rs 9 bn were classified as NPA. Rs 16 bn from 309 accounts was restructured in 1QFY13. Out of this 12 bn came from one State Electricity Board (SEB), and the rest were from a few other smaller accounts. The management expects a few more SEB accounts to be restructured which are in the pipeline. The monsoon deficiency and the risk of higher inflation however need to be watched as they could be potential triggers.

  • UBI has witnessed a 50% YoY increase in the absolute value of its gross NPAs over the last 12 months, since 1QFY12. The net NPAs have also moved up from 1.3% of total advances in 1QFY12 to 2.2% in 1QFY13. Provisioning coverage decreased to 59% for the quarter. Gross NPAs formed 3.76% of the gross banking credit at the end of 1QFY13 from 2.57% at the end of 1QFY12. The bank expects this to reduce to around 3% and plans to focus on recovery efforts.

What to expect?
At the current price of Rs 164.1, the stock is valued at 0.7 times its trailing twelve months price to book value. We will update our analysis on the stock shortly. The bank's performance this quarter was mainly marred by the increase in provisioning on account of a sharp increase in its restructured asset book and accretion to NPAs. But what worries us is the bank's 18.1% exposure to the infra space and further restructurings are expected in the power space, especially from SEBs. While these restructured accounts may not necessarily turn NPA (slippages of the restructured book into NPA remain high), they attract higher provisioning, thus will impact profits over the next few quarters. This is especially if the new RBI recommendations for further provisioning on restructured accounts are taken forward.

The bank expects to grow its deposits and advances in line with the RBI projections for FY13, however this may be in the lower yielding priority sector lending space, which may not do much for margins. UBI also plans to focus on loan recovery going forward, which has seen some traction so far this year. We have been conservative in our estimates on loan growth and asset quality. However we may need to factor in further restructuring in FY13. We continue to maintain our positive 'BUY' view on the stock. This is provided that investors' exposure to the stock is less than 2 to 3% of overall portfolio. Also do keep track of the bank's quarterly performance on the asset quality front.

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