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Union Bank: Margins continue to be dampener - Views on News from Equitymaster

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Union Bank: Margins continue to be dampener
Nov 3, 2009

Performance summary
  • Interest income grows by 20% YoY in 1HFY10 on the back of 15% YoY growth in advances.
  • Other income doubles due to higher income from treasury and 39% YoY growth in fees.
  • Net interest margin improves marginally QoQ from 2.2% in 1QFY10 to 2.3% in 1HFY10; significantly lower than 3.5% in 1HFY09.
  • Capital adequacy ratio at 13.8% as per Basel II at the end of 1HFY10.
  • Net NPA ratio higher at 0.2% in 1HFY10 from 0.1% in 1HFY09.


Rs (m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Interest income 28,289 32,056 13.3% 53,413 63,809 19.5%
Interest Expense 18,559 23,422 26.2% 35,792 47,158 31.8%
Net Interest Income 9,730 8,634 -11.3% 17,621 16,651 -5.5%
NIM (%)       3.5% 2.3%  
Other Income 2,856 5,553 94.4% 5,281 10,840 105.3%
Other Expense 5,589 6,086 8.9% 9,745 11,515 18.2%
Provisions and contingencies 2,032 1,348 -33.7% 4,989 3,253 -34.8%
Profit before tax 4,965 6,753 36.0% 8,168 12,723 55.8%
Tax 1,350 1,700 25.9% 2,270 3,250 43.2%
Profit after tax / (loss) 3,615 5,053 39.8% 5,898 9,473 60.6%
Net profit margin (%) 12.8% 15.8%   11.0% 14.8%  
No. of shares (m)         505.1  
Book value per share (Rs)*         156.7  
P/BV (x)         1.7  
* (Book value as on 30th September 2009)

What has driven performance in 2QFY10?
  • Union Bank of India (UBI) managed to hedge the slowdown in the growth of retail and agriculture segments by tapping the SME clients. The bankís net interest margins, however, continued to ail the topline performance. While the bank had to pass on lower interest rates to loan customers, the high cost bulk deposits in its books kept its interest costs high during 1HFY10. Thus despite sustenance of CASA proportion, UBIís NIMs were significantly lower in 1HFY10 as compared to that in 1HFY09. As per UBI, the repayment of bulk deposits is likely to improve NIMs to 2.6% in 3QFY10 and the same is likely to move up to 2.8% for 4QFY10. The bank estimates full year FY10 NIMs at 2.6%. On a conservative basis we have estimated UBIís NIMs at 2.2% for FY10.

    Leveraging SME support
      1HFY09 % of total 1HFY10 % of total Change
    Advances 865,512   994,300   14.9%
    Corporate 506,422 58.5% 532,140 53.5% 5.1%
    Agriculture 127,010 14.7% 155,990 15.7% 22.8%
    Retail 93,240 10.8% 108,910 11.0% 16.8%
    SME 138,840 16.0% 197,260 19.8% 42.1%
    Deposits 1,159,390   1,490,660   28.6%
    CASA 383,720 33.1% 491,420 33.0% 28.1%
    Term deposits 775,670 66.9% 999,240 67.0% 28.8%

  • The bankís cost to income ratio dropped marginally from 43% in 1HFY09 to 42% in 1HFY10 due to the base effect of provision for wage arrears and brand building expenses in the corresponding quarter of FY09. We expect this cost advantage to further improve the bankís efficiency ratios. The bank expects its cost to income ratio to stabilise at 41% by FY11 (one of the lowest in the banking sector).

  • Although UBI does have a lot of catching up to do with its peers in fee income, the same have shown signs of improvement over the past few quarters. The bankís fee income has grown by 39% YoY in 1HFY10. Nevertheless, it formed merely 8% of the bankís total income in 1HFY10. The growth in other income has been aided by gains on the treasury portfolio. The bank had 68% of the investment in the held-to-maturity basket (HTM) at the end of 1HFY10.

  • While UBI has witnessed a 14.7% YoY increase in the absolute value of its gross NPAs over the last 12 months; the net NPAs have marginally moved up from 0.1% of total advances in 1HFY09 to 0.2% in 1HFY10. Having said that, the NPA coverage ratio stood at 88% at the end of 1HFY10.The delinquency rate was 1% during the first six months of FY10 as against 1.2% in the corresponding period of FY09. The restructured loans stood at Rs 1.8 bn at the end of 1HFY10.

What to expect?
At the current price of Rs 262, the stock is valued at 1.1 times our estimated FY12 adjusted book value. Sustenance of a healthy current and savings account mix and little deterioration in asset quality also reiterates the operating efficiency of the bank. Going forward, with technological upgradation and aggressive growth strategies, the growth prospects of the bank appear enthusing. Having said that, excessive reliance on treasury income and inability to grow its fee income base are our lingering concerns with regard to the bank. We reiterate our positive view on the stock.

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