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Union Bank: NPAs see a sharp spike

Oct 28, 2011

Union Bank of India (UBI) declared its results for the second quarter of financial year 2011-2012 (1QFY12). The bank has reported 29% YoY growth in interest income and 16% YoY growth in net profits. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 8.2% YoY in 2QFY12, on the back of 16.5% YoY growth in advances.
  • NIMs (net interest margins) move down marginally from 3.2% in 1HFY11 to 3.1% in 1HFY12 on increased lending yields.
  • Net NPAs move up sharply from 1.18% in 1HFY11 to 2.04% in 1HFY12.
  • Net profit grows by 16% YoY in 2QFY12 on account of NII growth; however it fell by around 10% in 1HFY12 on higher provisioning.
  • Capital adequacy ratio is comfortable at 12.5% at the end of 2QFY12 as per Basel II.

Consolidated financial snapshot
Rs (m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Interest income 39,522 51,104 29.3% 76,379 100,262 31.3%
Interest expense 24,164 34,492 42.7% 47,540 67,747 42.5%
Net Interest Income 15,358 16,612 8.2% 28,839 32,514 12.7%
Netinterest margin (%)       3.2 3.1  
OtherIncome 5,096 5,009 -1.7% 9,446 9,849 4.3%
OtherExpense 9,149 9,571 4.6% 16,542 18,655 12.8%
Provisionsand contingencies 5,989 6,228 4.0% 7,962 10,512 32.0%
Profitbefore tax 5,317 5,823 9.5% 13,782 13,197 -4.2%
Tax 2,284 2,297 0.6% 4,734 5,027 6.2%
Effectivetax rate 42.9% 39.5%   34.3% 38.1%  
Profitafter tax/ (loss) 3,034 3,525 16.2% 9,048 8,169 -9.7%
Netprofit margin (%) 7.7% 6.9%   11.8% 8.1%  
No. ofshares (m)         524.3  
Bookvalue per share (Rs)*         228.8  
P/BV (x)         0.9  
* (Book value as on 30th September 2011)

What has driven performance in 1HFY12?
  • Union Bank of Indiaís share of low cost deposits decreased marginally to 32.1% in 1HFY12 from 32.7% earlier while growing its deposit base by 10% YoY. The bank consciously shed around Rs 60 bn in high cost deposits in order to protect its margins. Union Bank grew its advance book by 16.5% YoY in 1HFY12, and improved its net interest margins on higher lending yields and lower costs. However, growth saw a slowdown on account of the various rate hikes that the central bank has undertaken over the past few months. Going forward the bank estimates a 17-18% growth in advances for FY12; this is a revision versus its earlier expectation of a 19% growth in advances stated in 1QFY12 and the 22% projected at the end of FY11. The bank has gone slow on lending, especially on short term loans. 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) 1HFY11 % of total 1HFY12 % of total Change
    Advances 1,264,230   1,472,840   16.5%
    Deposits 1,777,800   1,955,720   10.0%
    CASA 581,110 32.7% 627,540 32.1% 8.0%
    Temdeposits 1,196,690 67.3% 1,328,180 67.9% 11.0%
    Credit deposit ratio 71.1%   75.3%    

  • The bank's cost to income ratio went up marginally from 43% in 1HFY11 to 44% in 1HFY12 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 4% YoY in 1HFY12. Nevertheless, it formed merely 13% of the bank's total income in 1HFY12. Fee income has come in lower as there have been fewer loan syndications on account of the slowdown in the economy and lower demand for credit. The benign increase in other income has been due to lower profit on sale of investments, however recoveries have increased, and the dollar appreciation led to higher income on foreign exchange.

  • Provisions saw an increase due to increased provisions on account of the RBIís revised norms for provisions on NPAs and restructured Assets. Investments have also seen a depreciation on account of higher government bond yields, due to the high interest rate environment. When yields increase, the value of the bonds decrease on account of the inverse relationship between the two variables.

  • UBI has witnessed a whopping 46% YoY increase in the absolute value of its gross NPAs over the last 12 months, since 2QFY11. The increase has mainly come in from the migration of accounts below Rs 500,000 to the system. Thus, as of now the bank has completely moved all its accounts onto the system, thus further surprises on the NPA front may come at a lower intensity. Net NPAs have also moved up from 1.18% of total advances in 1HFY11 to 2.04% in 1HFY12. Provisioning coverage however declined to at 60.5% for the year. Gross NPAs formed 3.49% of the gross banking credit at the end of 1HFY12 from 2.79% at the end of 1HFY11. The bank expects this to reduce to reduce to around 2.65% at the end of March 2012. The bank has upped its guidance on the NPA front from the 2% expected earlier on account of higher slippages seen on account of the transfer of smaller accounts onto the banking system.
What to expect?
At the current price of Rs 212.2, the stock is valued at 0.7 times our estimated FY14 adjusted book value. The bankís performance this quarter was mainly marred by the increase in NPAs on account of the shift of sub Rs 5 lakh accounts onto the system. Thus from here the performance is expected to improve as there may not be such a sharp increase going forward. 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. It plans to focus on loan recovery going forward. We have nonetheless been conservative in our estimates; however we may need to account for a slightly higher deterioration in asset quality. Plus in light of the RBIís latest rate hike, and savings bank account deregulation we may need to revise our estimates on the stock.

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