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Union Bank: The only growth is in provisions - Views on News from Equitymaster
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Union Bank: The only growth is in provisions
Sep 8, 2015

Union Bank of India (UBI) declared its results for the first quarter (1QFY16). While the bank has reported 0.6% YoY growth in net interest income, net profits declined by 21.9% YoY.

Performance summary
  • Net interest income (NII) reported a marginal rise of 0.6% YoY in 1QFY16 as interest expenses grew by a faster 6.8% YoY.
  • Other income rose by 13.3% YoY during 1QFY15 driven by 24.4% growth in core fee income.
  • The cost-income ratio declined to 48.9% in 1QFY16 from 51.2% a year ago.
  • Provisioning costs for the quarter increased by 63.5% YoY.
  • The share of Net NPAs in advances increased from 2.46% in 1QFY15 to 3.08% in 1QFY16.
  • Net profit fell by 21.9% YoY in 1QFY15 on account of higher provisioning.
  • Capital adequacy ratio stands at 10.14% at the end of 30th June 2015 as per Basel III norms.

Standalone Financial Performance Snapshot
Rs (m) 1QFY15 1QFY16 Change
Interest income 78,562 82,599 5.1%
Interest expense 57,390 61,298 6.8%
Net Interest Income 21,172 21,302 0.6%
NIMs 2.68 2.46  
Other Income 6,914 7,832 13.3%
Other Expense 14,366 14,252 -0.8%
Provisions and contingencies 3,928 6,424 63.5%
Profit before tax 9,791 8,458 -13.6%
Tax 3,150 3,270 3.8%
Effective tax rate 32.2% 38.7%  
Profit after tax/ (loss) 6,641 5,188 -21.9%
Net profit margin (%) 8.5% 6.3%  
No. of shares (m)   635.8  
Book value per share (Rs)*   296.3  
P/BV (x)   0.5  
* (Book value as on 30 June, 2015)

What has driven performance in 1QFY16?
  • The bank's gross advances grew by a subdued 6.7% in June 2015 quarter due to a mere 1.7% credit offtake by the MSME segment. The growth in deposits was much higher at 10% aided by a 10.6% growth in savings deposits. The overall share of CASA accounts in total deposits fell down slightly to 28.3% for the quarter. However the share of high cost deposits have fallen to 5.4% in June 2015 quarter as compared to 13.5% in June 2014 quarter.

  • The growth in the Net Interest Income has been subdued as interest expenses have grown at a faster pace. The domestic NIMs have contracted to 2.46% in June 2016 quarter as compared to 2.68% in June 2015 quarter.

  • However non-interest income grew by 13.3% during the quarter on the back of 24.4% growth in core fee income. Operating expenses were down by 0.8% for the quarter backed by reduction in non-employee expenses. But a steep 63.5% jump in provisioning along with higher tax incidence pulled down net profit by 21.9% during the quarter.

  • The asset quality of the bank has deteriorated further on account of higher slippages. The net NPA to total advances ratio has risen to 3.08% in June 2015 quarter from 2.46% in June 2014 quarter. The provision coverage ratio stood at 58% for the quarter.

  • The total restructured advances of the bank stood at Rs 1.4 trillion forming 5.5% of Gross Loans as on 30th June 2015. Loss making State Electricity Boards (SEBs) made up for 43% of the outstanding standard restructured advances of the bank.

  • Rising bad loans continued to pull down the efficiency of the bank. The Return on Assets ratio was down to 0.55% in June 2015 quarter from 0.77% in June 2014 quarter. Even the Return on Equity has fallen by 3% to 11% during the quarter.

  • The risk adjusted Capital Adequacy ratio as per Basel III norms stood at 10.14% for June 2015 quarter.

What to expect?

At the current stock price level, the stock is valued at 0.5 times its book value as on 30th June 2015.

Sliding asset quality continues to weigh down on the bank's earnings. We had recommend investors to SELL the stock of Union Bank of India in June 2014. Unless asset quality issues witness improvement, we continue to recommend subscribers not to buy the stock at current price levels.

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