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Union Bank: Agri NPAs take toll on profits - Views on News from Equitymaster
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Union Bank: Agri NPAs take toll on profits
Nov 15, 2010

Union Bank of India declared its 2QFY11 results. The bank has reported a 73% YoY growth in net interest income. However net profits dropped by 40% YoY due to higher provisioning. Here is our analysis of the results.

Performance summary
  • Interest income grows by 20% YoY in 1HFY11 on the back of 27% YoY growth in advances.
  • Other income falls by 13% YoY due to lower treasury income.
  • Net interest margin improves from 2.4% in 1HFY10 to 3.2% in 1HFY11 due to re-pricing of assets.
  • Capital adequacy ratio at 12.5% as per Basel II at the end of 1HFY11.
  • Net NPA ratio higher at 1.2% in 1HFY11 from 0.2% in 1HFY10.

Rs (m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Interest income 32,319 39,522 22.3% 63,808 76,379 19.7%
Interest Expense 23,422 24,164 3.2% 47,158 47,540 0.8%
Net Interest Income 8,897 15,358 72.6% 16,650 28,839 73.2%
NIM (%)       2.4% 3.2%  
Other Income 5,290 5,096 -3.7% 10,840 9,446 -12.9%
Other Expense 6,086 9,148 50.3% 11,515 16,542 43.7%
Provisions and contingencies 1,349 5,989 344.0% 3,253 7,962 144.8%
Profit before tax 6,752 5,317 -21.3% 12,722 13,781 8.3%
Tax 1,700 2,283 34.3% 3,250 4,733 45.6%
Profit after tax / (loss) 5,052 3,034 -39.9% 9,472 9,048 -4.5%
Net profit margin (%) 15.6% 7.7%   14.8% 11.8%  
No. of shares (m)       505.1 505.1  
Book value per share (Rs)*         193.5  
P/BV (x)         2.0  
* (Book value as on 30th September 2010)

What has driven performance in 2QFY11?
  • While managing to sustain its share of low cost deposits to 33%, Union Bank of India (UBI) showed robust growth in advances in the first half of FY11. UBI grew its advance book by 27% YoY in 1HFY11, without sacrificing on margins. In order to hedge the slowdown in the growth of retail and agriculture segments, the bank tapped SME clients. The higher proportion of CASA enabled the banks to get back to its long term average NIMs that were impacted by the bulk deposit rates in FY10. Re-pricing the corporate loans as per the base rate also helped the bank improve margins. Going forward the bank estimates 25% growth in advances and NIMs in the range of 2.8% to 3% in the near term.

    Leveraging SME support
      1HFY10 % of total 1HFY11 % of total Change
    Advances 994,390   1,264,230   27.1%
    Corporate 532,230 53.5% 711,850 56.3% 33.7%
    Agriculture 155,990 15.7% 179,050 14.2% 14.8%
    Retail 108,910 11.0% 145,630 11.5% 33.7%
    SME 197,260 19.8% 227,700 18.0% 15.4%
    Deposits 1,490,660   1,777,800   19.3%
    CASA 491,471 33.0% 581,163 32.7% 18.2%
    Term deposits 999,189 67.0% 1,196,637 67.3% 19.8%

  • The bank’s cost to income ratio went up marginally from 42% in 1HFY10 to 43% in 1HFY11 due to the additional hiring and expansion in franchise. The bank expects its cost to income ratio to stabilise at 42% by the end of FY11.

  • 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 bank’s fee income has grown by 9% YoY in 1HFY11. Nevertheless, it formed merely 5% of the bank’s total income in 1HFY11. The fall in other income has been due to foreign exchange related losses and lower treasury gains.

  • While UBI has witnessed a 46% YoY increase in the absolute value of its gross NPAs over the last 12 months; primarily from the bank’s restructured assets. The net NPAs have also moved up from 0.2% of total advances in 1HFY10 to 1.2% in 1HFY11. Having said that, the NPA coverage ratio stood at 70% at the end of September 2010. The same was 88% at the end of 1HFY10. The restructured assets that turned into NPAs in the last 6 months were to the tune of Rs 2.2 bn.

What to expect?
At the current price of Rs 382, the stock is valued at 1.3 times our estimated FY13 adjusted book value (ResearchPro subscribers can view latest updates here). Despite sustenance of a healthy current and savings account mix and improvement in margins, the deterioration in asset quality, albeit temporary, is our prime concern about the bank. Further, excessive reliance on treasury income may prove to be risky. We may have to review our estimates for the stock taking into account the need for incremental provisioning.

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