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Union Bank: Worst is not yet behind - Views on News from Equitymaster

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Union Bank: Worst is not yet behind
Aug 1, 2013

Union Bank of India (UBI) declared its results for the first quarter of financial year 2013-2014 (1QFY14). The bank has reported 13.0% YoY growth in net interest income and 9.5% YoY growth in net profits. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grows by 13.0% YoY in 1QFY14, on the back of 15.0% YoY growth in advances.
  • NIMs (net interest margins) decline to 2.6% in 1QFY14 from 3.0% in 1QFY13.
  • Net NPAs move down to 1.96% in 1QFY14 from 2.2% in 1QFY13. Gross NPAs too stood lower at 3.5% levels vis-a-vis 3.8% same quarter previous year.
  • Net profit rises by 9.5% YoY in 3QFY13 on account of strong non-interest income and lower taxes.
  • Capital adequacy ratio stands at 9.9% at the end of 30th June 2013 as per Basel III norms.

Rs (m) 1QFY13 1QFY14 Change
Interest income 60,699 68,573 13.0%
Interest expense 42,482 49,482 16.5%
Net Interest Income 18,217 19,091 4.8%
Net interest margin (%) 3.0% 2.6%  
Other Income 4,912 7,563 54.0%
Other Expense 10,459 12,536 19.9%
Provisions and contingencies 5,185 6,816 31.5%
Profit before tax 7,486 7,302 -2.5%
Tax 2,370 1,700 -28.3%
Effective tax rate 31.7% 23.3%  
Profit after tax/ (loss) 5,116 5,602 9.5%
Net profit margin (%) 8.4% 8.2%  
No. of shares (m)   596.8  
Book value per share (Rs)*   299.1  
P/BV (x)   0.5  
* (Book value as on 30th June 2013)
What has driven performance in 1QFY14?
  • Despite challenging times, the business growth for Union bank stood out particularly encouraging in the June 2013 quarter. The advance growth YoY at 16.5% and deposit growth YoY at 22.3% surpassed the industry averages. MSME (43% YoY growth), agri (23% YoY) and retail (23% YoY) were the three growth engines that drove the advances portfolio for Union Bank. The retail book in turn was driven by the housing loan portfolio that formed 63% of the retail pie during the quarter ended June 2013. However, the bank continues to have exposure to certain risky portfolios such as metals , textiles and gems and jewellery; albeit in smaller proportions.

    Both Advances and Deposits observe robust growth...
    (Rs m) 1QFY13 % of total 1QFY14 % of total Change
    Advances 1,739,110   2,026,420   16.5%
    Deposits 2,221,100   2,715,580   22.3%
    CASA 687,420 30.9% 791,080 29.1% 15.1%
    Tem deposits 1,533,680 69.1% 1,924,500 70.9% 25.5%
    Credit deposit ratio 78.3%   74.6%    

  • While the advances grew at healthy pace, deposit growth improved further recording strong 22.3% YoY growth for the quarter. The bank continues to shed-off its high cost bulk deposits and expand its CASA base. High Cost Deposits (including CDs) decreased from Rs 368.7 bn in June 2012 to Rs 216.4 bn in June 2013. CASA deposits reported 15% YoY growth backed by 14% YoY growth in savings deposits during the quarter. The number of CASA account opened during the quarter stood at 9.4 lakhs. The CASA ratio, however, was seen marginally down from 30.9% in 1QFY13 to 29.1% in 1QFY13 on account of difficulties in raising low-cost deposits.

  • While the strong loan growth did translate into healthy interest income performance for Union Bank, the net interest income did not make its mark primarily due to higher interest costs and reduced exposure to high yielding risky assets. Consequently, the margins declined to 2.6% in 1QFY14 from 3.0% in 1QFY13.

  • The whopping other income growth at 54% YoY that largely boosted the earnings for the bank was primarily driven by the sturdy gains in treasury portfolio of the bank. The core non-interest income grew by 19.3% YoY. However, the treasury gains may not surface in the coming quarters on account of volatile market conditions and hence the bank may not replicate such a huge surge in non-interest income in the forthcoming quarters.

  • The other expenses for the quarter have gone up by 19.9% YoY on account of wage-related provisions registered during the quarter. Hence, the cost-income ratio was seen up at 47% levels from 45% in 1QFY13. Improving operating efficiency forms the priority area for the bank as it continues to provide for wages in the coming quarters.

  • While the bad loans were down on annual basis, on sequential basis Union Bank witnessed deterioration in asset quality. The asset quality, after holding up well for last three quarters, did show up surge in bad loans this quarter. Two lumpy accounts from gems and jewellery and IT-enabled services sector together amounting to approximately Rs 6 bn added to the asset quality woes of the bank. Nonetheless, on annual basis it showed improvement with Net NPAs moving down to 1.96% in 1QFY14 from 2.2% in 1QFY13. Gross NPAs too stood lower at 3.5% levels vis-a-vis 3.8% same quarter previous year. The bank endeavors to maintain NPAs below 3% levels.

  • The slippages for the quarter stood at Rs 15 bn of which 4 accounts amounting to Rs 9 bn added to the lumpiness. While the recoveries did not stood high during the quarter on account of lumpy accounts, going forward the management intends to improve on this front.

  • The total assets restructured during the quarter amounted to Rs 11 bn whereas the outstanding restructured balance stand at Rs 180 bn as at the end of June 2013. Notably, out of the total SEB loan exposure to the tune of Rs 122 bn, Rs 30 bn have already been restructured. And another Rs 22-23 bn forms part of the restructuring pipeline that is expected to surface in the coming quarters. State-wise Rajasthan and UP accounted for Rs 23 bn towards restructuring during 1QFY14. Given the exposure to power and other infrastructure accounts, the worst is not yet behind for Union Bank.

  • For 1QFY14, the bank witnessed 9.5% YoY growth on the bottom-line front primarily on the back of robust other income and lower tax provisions.
What to expect?
At the current price of Rs 126, the stock is valued at 0.5 times our estimated FY15 adjusted book value. The first quarter of FY14 witnessed deterioration in asset quality post remarkable improvement demonstrated by Union bank in the preceding three quarters. Couple of lumpy accounts added to the asset quality woes for the bank. Moreover, insubstantial slippages and the restructured pipeline albeit small continue to linger for the bank.

Also, imminent margin pressures owing to poor yields and lack of treasury gains going ahead may weigh on the earnings performance of the bank. Moreover, incumbent capital raising in the near term and requirements for BASEL III implementation may compress the RoEs for the bank.

Asset quality worries and the rather lower return ratios prompt us to maintain a Hold recommendation on the stock. We believe the investors should wait and watch the shaping up of asset quality in near future before buying into the stock.

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