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Union Bank: Asset quality worries persist
Aug 13, 2014

Union Bank of India (UBI) declared its results for the first quarter of the financial year 2014-2015 (1QFY15). The bank has reported decent 10.9% YoY growth in net interest income and a healthy 18.5% YoY growth in net profits. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grows by modest 10.9% YoY in 1QFY15, on the back of robust 17.8% YoY growth in advances.
  • Other income declines by 8.6% YoY during 1QFY15 on account of treasury losses and investment sale losses.
  • The cost-income ratio goes up to 51% levels in 1QFY15 from 47% a year ago.
  • Provisioning costs for the quarter dipped by 42.4% YoY.
  • Net NPAs move upwards from 1.96% in 1QFY14 to 2.46% in 1QFY15. Gross NPAs too stood on the higher side at 4.27% levels.
  • Net profit improves by 18.5% YoY in 1QFY15 on account of lower provisioning and decent interest income.
  • Capital adequacy ratio stands at 10.4% at the end of 30th June 2014 as per Basel III norms.

Standalone Financial Performance Snapshot
Rs (m) 1QFY14 1QFY15 Change
Interest income 68,573 78,562 14.6%
Interest expense 49,482 57,390 16.0%
Net Interest Income 19,091 21,172 10.9%
Net interest margin (%) 2.6% 2.6%  
Other Income 7,563 6,914 -8.6%
Other Expense 12,536 14,366 14.6%
Provisions and contingencies 6,816 3,928 -42.4%
Profit before tax 7,302 9,791 34.1%
Tax 1,700 3,150 85.3%
Effective tax rate 23.3% 32.2%  
Profit after tax/ (loss) 5,602 6,641 18.5%
Net profit margin (%) 8.2% 8.5%  
No. of shares (m)   630.3  
Book value per share (Rs)*   279.9  
P/BV (x)   0.7  
* (Book value as on 30th June 2014)

What has driven performance in 1QFY15?
  • The earnings for the first quarter have improved on account of write-back of investment depreciation; the asset quality continues to remain under pressure. Therefore, had it not been for these write-backs, the Union Bank profitability would have come under pressure. Moreover, deterioration in asset quality and higher levels of slippages have continued to weigh down the earnings performance of Union Bank. We do not expect any strong development in credit quality too soon and hence we remain cautious on this front.

  • The bank continues to focus on the retail (31.2% YoY growth), agriculture (29.4% YoY) and SME (31.4% YoY) segments and these also proved to be the loan growth drivers for the bank. Housing loan portfolio contributed almost 60% to the total retail loan pie of the bank.

  • However, the CASA deposits continue to remain subdued for Union Bank. The growth in current deposits has remained muted and the savings deposits too have reported a modest 12.4% YoY growth during 1QFY15. Therefore, the overall CASA share for the bank remained at tepid levels of 29.1% in 1QFY15. The bank is already laying greater emphasis on savings account traction. However, the liability side of the balance sheet remains weaker.

  • Margins too have remained stagnant during the first quarter at 2.6% on YoY basis. Pressures on asset yields and higher costs of funds have dampened the margins for the bank for few quarters now. Muted CASA growth too has proved margins deterrent too.

  • The asset quality for Union bank continues to deteriorate and the bad loans have stood higher for the quarter. The slippages have remained at elevated levels at Rs 12.7 bn. While sequential traction in recoveries remains upbeat, on annual basis they have declined. Agri and MSE portfolios continue to show up elevated bad loan problems.

  • Subsequently, the return ratios for the bank have remained moderated. RoE at 15.1% and RoA at 0.7% are still not up to the mark.
What to expect?
At the current price of Rs 190, the stock is valued at 0.8 times our estimated FY17 adjusted book value.

Asset quality woes and cost inefficiencies continue to haunt Union Bank’s earnings. Business consolidation and book clean-up exercise is expected to consume reasonable time-frame for the bank. In addition to that, meeting up the priority sector targets also stand looming. Therefore, margins pressures stand imminent.

That said, we are sanguine about the concerted efforts of the management to clean up the books and maintain the earnings stability. However, the return ratios still remain on the lower side.

We had recommend investors to SELL the stock of Union Bank of India in June 2014.

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