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Union Bank: Profits up on lower provisions - Views on News from Equitymaster

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Union Bank: Profits up on lower provisions
Nov 7, 2012

Union Bank of India (UBI) declared its results for the second quarter of financial year 2012-2013 (2QFY13). The bank has reported 20% YoY growth in interest income and 57% YoY growth in net profits or the quarter. Here is our analysis of the results.

Performance summary
  • Net interest income grows by 11.4% YoY in 2QFY13, on the back of 20% YoY growth in advances.
  • NIMs (net interest margins) move down marginally from 3.1% in 1HFY12 to 3% in 1HFY13.
  • Net NPAs stay steady at 2.06% in 1HFY13 from 2.04% in 1HFY12. Versus the previous quarter, Net NPAs are down from 2.2% seen in June 2012.
  • Net profit grows by 57% YoY in 2QFY13 on account of lower provisioning and lower tax outlay. Profits increased by around 30% in 1HFY13.
  • Capital adequacy ratio is reasonable at 11.4% at the end of 2QFY13 as per Basel II.

Rs (m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Interest income 51,104 61,098 19.6% 100,262 121,797 21.5%
Interest expense 34,492 42,597 23.5% 67,747 85,078 25.6%
Net Interest Income 16,612 18,502 11.4% 32,514 36,719 12.9%
Net interest margin (%)       3.1 3.0  
Other Income 5,009 5,458 9.0% 9,849 10,370 5.3%
Other Expense 9,571 11,234 17.4% 18,655 21,692 16.3%
Provisions and contingencies 6,228 4,871 -21.8% 10,512 10,056 -4.3%
Profit before tax 5,823 7,856 34.9% 13,197 15,342 16.3%
Tax 2,297 2,310 0.5% 5,027 4,680 -6.9%
Effective tax rate 39.5% 29.4%   38.1% 30.5%  
Profit after tax/ (loss) 3,525 5,546 57.3% 8,169 10,662 30.5%
Net profit margin (%) 6.9% 9.1%   8.1% 8.8%  
No. of shares (m)         550.5  
Book value per share (Rs)*         256.9  
P/BV (x)         0.9  
(*On a trailing 12-month basis)

What has driven performance in 1HFY13?
  • Union Bank of India's share of low cost deposits decreased to 30.5% in 1HFY13 from 32% earlier while growing its deposit base by 15.6% YoY, in line with the sector expectations. The bank grew its advance book by 20% YoY in 1HFY13, and kept its net interest margins steady, despite an increase in cost of funds and reduced lending rates. The bank has indicated for a 17% growth in advances for the year.

    Balance sheet growth picks up...
    (Rs m) 1HFY12 % of total 1HFY13 % of total Change
    Advances 1,472,840   1,766,710   20.0%
    Deposits 1,955,720   2,260,950   15.6%
    CASA 627,540 32.1% 689,630 30.5% 9.9%
    Tem deposits 1,328,180 67.9% 1,571,320 69.5% 18.3%
    Credit deposit ratio 75.3%   78.1%    

  • The bank's cost to income ratio went up from 44% in 1HFY12 to 46% in 1HFY13 mainly on higher employee costs and other expenses.

  • The bank is targeting to take the total domestic branches to 3,500 from the current around 3,300 and the ATMs to 5,000 from the current 4,185 by end of the fiscal.

  • UBI has improved its performance on the fee income front. The bank's fee income has grown by 17% YoY in 1HFY13. Nevertheless, it formed merely 14% of the bank's total income in 1HFY13. The benign increase in other income has been due to falling treasury income 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 a decrease due to lower NPA provisioning. The bank also saw a reversal of investment depreciation which also contributed to lower provisioning impact.

  • UBI has witnessed 26% YoY increase in the absolute value of its gross NPAs over the last 12 months, since 2QFY12. Rs 8.4 bn of restructuring was also undertaken from 179 accounts during the quarter. However, this came in at a slower pace versus last quarter. The bank saw much lower fresh slippages which came in at Rs 7.9 bn versus Rs 18 bn in 1HFY12. Net NPAs thus stayed constant at 2.06% of total compared to 2.04% in 1HFY12. Credit cost (provisions to advances) decreased to 0.8% in Sept '12 compared to 1.35% last year, thus showing a declining trend in provisioning, which is a positive for the bank. Gross NPAs formed 3.66% of the gross banking credit at the end of 1HFY13 from 3.49% at the end of 1HFY12. The bank expects this to reduce to reduce to around 3% for the year. However, the economy is still in a flux and thus the management is cautious on future asset quality outlook with sectors like power, textiles, iron and steel, hospitality etc seeing some stress. At such time we believe writing back provisions to shore up profits is not a prudent move by the bank. Especially since even RBI has been warning banks about appropriate accounting for restructured assets and adequate provisioning

What to expect?
At the current price of Rs 222, the stock is valued at 0.9 times its FY15 estimated adjusted book value. The bank's performance this quarter was boosted by lower loan restructuring and slippages versus what was seen in previous quarters. The bank's management has strongly focused on improving asset quality and this had reaped benefits. But what worries us is the bank's 17.9% exposure to the infra space and 12% exposure to NBFCs and Housing Finance companies. However what comforts us is that future restructurings may not come in at a similar space. The management still expects a pipeline of Rs 25-30 bn in restructuring for the year.

The bank expects to grow its deposits and advances in line with the RBI projections for FY13, however this may be in the lower yielding priority sector lending space, which may not do much for margins. UBI also plans to further focus on loan recovery going forward, which has seen some traction so far this year. We continue to maintain our positive 'BUY' view on the stock. This is provided that investors' exposure to the stock is less than 2 to 3% of overall portfolio.

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