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Union Bank: Capital constraints may hurt growth - Views on News from Equitymaster
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Union Bank: Capital constraints may hurt growth
Nov 4, 2014

Union Bank of India (UBI) declared results for the second quarter (2QFY15) and first half (1HFY15) of the financial year 2014-2015. The bank has reported 6.6% YoY growth in net interest income and 78.4% YoY growth in net profits in 2QFY15. For 1HFY15, the profits were up by 34.8% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grows by modest 6.6% YoY in 2QFY15, on the back of decent 10.3% YoY growth in advances.
  • Other income increases by robust 32.8% YoY during 2QFY15 on account of treasury gains and recoveries.
  • The cost-income ratio goes up to 54% levels in 2QFY15 from 52% a year ago.
  • Provisioning costs for the quarter dropped by 16.2% YoY.
  • Net NPAs move upwards from 2.15% in 2QFY14 to 2.71% in 2QFY15. Gross NPAs too stood on the higher side at 4.27% levels.
  • Net profit improves by whopping 78.4% YoY in 2QFY15 and 34.8% YoY for 1HFY15 on account of low base effect.
  • Capital adequacy ratio stands barely above regulatory requirement, at 10.3% at the end of 30th September 2014 as per Basel III norms.

Standalone Financial Performance Snapshot
Rs (m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Interest income 72,711 79,434 9.2% 141,284 157,996 11.8%
Interest expense 53,167 58,589 10.2% 102,648 115,979 13.0%
Net Interest Income 19,545 20,844 6.6% 38,636 42,016 8.7%
Net interest margin (%)       2.7% 2.6%  
Other Income 6,112 8,113 32.8% 13,674 15,027 9.9%
Other Expense 13,407 15,618 16.5% 25,943 29,985 15.6%
Provisions and contingencies 9,368 7,854 -16.2% 16,183 11,782 -27.2%
Profit before tax 2,882 5,485 90.3% 10,184 15,276 50.0%
Tax 801 1,772 121.3% 2,501 4,922 96.8%
Effective tax rate 27.8% 32.3%   24.6% 32.2%  
Profit after tax/ (loss) 2,081 3,713 78.4% 7,683 10,355 34.8%
Net profit margin (%) 2.9% 4.7%   5.4% 6.6%  
No. of shares (m)         635.8  
Book value per share (Rs)*         283.3  
P/BV (x)         0.8  
* (Book value as on 30th September 2014)

What has driven performance in 2QFY15?
  • The low base effect led the earnings higher for the Union Bank of India during the second quarter and first half of FY15. Fundamentally, we did not witness any material change to business and earnings of the bank. Moreover, deterioration in asset quality and higher levels of slippages has continued to haunt 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.

  • Retail, agri and MSME continue to remain the loan book growth drivers for the bank. While the retail portfolio grew 28.5% YoY, agriculture reported 28.4% YoY growth followed by robust 31.6% YoY growth by MSME segment. Housing loan portfolio contributed almost 60% to the total retail loan pie of the bank. Owing to tough macros, the bank has slowed down on its corporate loan portfolio.

  • The CASA deposits continue to remain subdued for Union Bank. The growth in current deposits has declined and the savings deposits too have reported a modest 10.8% YoY growth during 2QFY15. Therefore, the overall CASA share for the bank remained at tepid levels of 28.7% in 2QFY15. Overall, the deposit growth too remained subdued reporting tepid 4.6% YoY growth. The bank is already laying greater emphasis on savings account traction. However, the liability side of the balance sheet remains weaker.

  • NIMs too have declined during the first half of FY15 to 2.6% levels as against 2.7% a year ago. Higher costs of funds and muted CASA have dampened the margins for the bank for few quarters now.

  • The asset quality for Union Bank continues to deteriorate and the bad loans have stood higher for the quarter. The slippages continue to elevate and were reported at Rs 19.7 bn during 2QFY15. While traction in recoveries remains upbeat, it remains below expectations. Agri and MSE portfolios continue to show up acute bad loan problems. The fact that the bank has chosen to write back provisions despite the NPA problems is a matter of grave concern.

  • The return ratios for the bank stand depressed. RoE at 11.5% and RoA at 0.4% stand one of the lowest in the industry.
What to expect?
At the current price of Rs 226, the stock is valued at 0.9 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.

The management continues to engage itself into clean up of the books and commits to 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. Given the concerns on the bank's fundamentals, we reiterate our view on the stock.

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