Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2019 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Union Bank: Core business drives growth - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Union Bank: Core business drives growth

Oct 31, 2008

Performance summary
  • Interest income grows by 24% YoY in 1HFY09 on the back of 26% YoY growth in advances.
  • Other income growth remains flat despite support of fee income.
  • Net interest margin improves to 3.0% in 1HFY09 from 2.5% in 1HFY08.
  • Capital adequacy ratio at 11.8% as per Basel II at the end of 1HFY09.
  • Net NPA ratio improves from 0.7% to 0.1% in the last 12 months.

Rs (m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Interest income 22,384 28,312 26.5% 43,125 53,645 24.4%
Interest Expense 15,820 18,559 17.3% 29,219 35,792 22.5%
Net Interest Income 6,564 9,753 48.6% 13,906 17,853 28.4%
NIM (%)       2.5% 3.0%  
Other Income 2,873 2,833 -1.4% 5,026 5,049 0.5%
Other Expense 4,153 5,588 34.6% 8,394 9,745 16.1%
Provisions and contingencies 976 2,033 108.3% 2,529 4,989 97.3%
Profit before tax 4,308 4,965 15.3% 8,009 8,168 2.0%
Tax 1,550 1,350 -12.9% 3,000 2,270 -24.3%
Profit after tax / (loss) 2,758 3,615 31.1% 5,009 5,898 17.7%
Net profit margin (%) 12.3% 12.8%   11.6% 11.0%  
No. of shares (m)         505.1  
Book value per share (Rs)*         122.8  
P/BV (x)         1.1  
* (Book value as on 30th September 2008)

What has driven performance in 2QFY09?
  • Union Bank of India (UBI) managed to hedge the slowdown in the growth of retail and agriculture segments by tapping the SME clients. The higher yield on advances and increased CASA proportion also helped the bank improve its NIMs by 0.5%. The bank has also set a target of growing advances and deposits by 22% YoY and 23% YoY respectively, enhancing its CASA proportion by 2% annually and is targeting NIM of 2.8% for FY09.

    Leveraging SME support
    1HFY08 % of total 1HFY09 % of total Change
    Advances 685,971   865,490   26.2%
    Corporate 394,931 57.6% 506,400 58.5% 28.2%
    Agriculture 113,780 16.6% 127,010 14.7% 11.6%
    Retail 71,630 10.4% 93,240 10.8% 30.2%
    SME 105,630 15.4% 138,840 16.0% 31.4%
    Deposits 948,040   1,159,390   22.3%
    CASA 308,160 33.3% 383,720 34.8% 24.5%
    Term deposits 639,880 66.7% 775,670 65.2% 21.2%

  • The bank’s cost to income ratio marginally increased from 44.0% in 1HFY08 to 44.4% in 1HFY09 due to provision for wage arrears as also for brand building expenses. Also, the bank has proactively fully provided for its AS15 requirement of Rs 3.5 bn in FY08 itself. Thus, it is unlikely to see any negative or one time cost surprises in the medium term. We expect this cost advantage to further improve the bank’s efficiency ratios. The bank expects its cost to income ratio to stabilise at 41% by FY10 (one of the lowest in the banking sector).

  • UBI has a lot of catching up to do with its peers in fee income, which although has grown by 32.9% YoY in 1HFY09, forms merely 19.6% of the bank’s total income (17.8% in 1HFY08). The growth in other income has also been eroded by the losses on treasury portfolio. The bank had 67% of the investment in the held-to-maturity basket (HTM) at the end of 1HFY09.

  • While UBI has witnessed a 14.7% YoY reduction in the absolute value of its gross NPAs over the last 12 months; the net NPAs too have declined from 0.6% of total advances in 1HFY08 to 0.2% in 1HFY09. More importantly, the NPA coverage ratio stood at 93.1%at the end of 1HFY09 (74% in 1HFY08).

What to expect?
At the current price of Rs 128, the stock is valued at 0.6 times our estimated FY11 adjusted book value. While the bank is currently comfortably placed in terms of capital adequacy to grow its business and for Basel II compliance (post Basel II CAR 11.6%), it may have to opt for dilution (rights issue) in the medium term. Adequate capital, a high provisioning cover and reasonable consistency in asset quality makes it a de-risked play in the PSU banking space.

To Read the Full Story, Subscribe or Sign In
To Read the Full Story, Subscribe or Sign In

Get the Indian Stock Market's
Most Profitable Ideas

How To Beat Sensex Guide 2019
Get our special report, How to Beat Sensex Nearly 3X Now!
We will never sell or rent your email id.
Please read our Terms


Mar 22, 2019 11:29 AM


  • Track your investment in UNION BANK with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks