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Union Bank: Higher provisions mar profits

Nov 25, 2013

Union Bank of India (UBI) declared its results for the second quarter (2QFY14) and first half of financial year 2013-2014. The bank has reported 5.6% YoY growth in net interest income but the profits dropped by 62.5% YoY during 2QFY14. The profits for 1HFY14 have also dropped by 27.9% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income (NII) grows by 5.6% YoY in 2QFY14, on the back of robust 24.6% YoY growth in advances.
  • NIMs (net interest margins) decline to 2.6% in 1QFY14 from 3.0% in 1QFY13.
  • Net NPAs have inched upwards to 2.15% in 2QFY14 from 2.06% in 2QFY13. Gross NPAs stood marginally lower at 3.6% levels vis-a-vis 3.7% same quarter previous year; but were up on sequential basis.
  • Net profit declines by 62.5% YoY in 2QFY14 on account of weak net interest income and higher provisions.
  • Capital adequacy ratio stands at 9.7% at the end of 30th September 2013 as per Basel III norms.

Rs (m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Interest income 61,098 72,711 19.0% 121,797 141,284 16.0%
Interest expense 42,597 53,167 24.8% 85,078 102,648 20.7%
Net Interest Income 18,502 19,545 5.6% 36,719 38,636 5.2%
Net interest margin (%)       3.1 2.7  
Other Income 5,458 6,112 12.0% 10,370 13,674 31.9%
Other Expense 11,234 13,407 19.3% 21,692 25,943 19.6%
Provisions and contingencies 4,871 9,368 92.3% 10,056 16,183 60.9%
Profit before tax 7,856 2,882 -63.3% 15,342 10,184 -33.6%
Tax 2,310 801 -65.3% 4,680 2,501 -46.6%
Effective tax rate 29.4% 27.8%   30.5% 24.6%  
Profit after tax/ (loss) 5,546 2,081 -62.5% 10,662 7,683 -27.9%
Net profit margin (%) 9.1% 2.9%   8.8% 5.4%  
No. of shares (m)   596.8        
Book value per share (Rs)*   302.4        
P/BV (x)   0.4        

What has driven performance in 2QFY14?
  • Union Bank continues to amass good business with advances reporting 25.5% YoY growth and deposits reporting 27.0% YoY growth. Three major growth drivers; viz; MSME (41.4% YoY growth), retail (28.5% YoY growth) and Agri (27.1% YoY growth) boosted the credit-offtake for Union bank. Housing loans contributed 60% to the overall retail asset portfolio. Global business too did well with 26.3% YoY growth as on September 2013.
  • The whopping 27% growth in total deposits was supported by 28% YoY growth in CASA base and 71.8% YoY growth in term deposits. The bank added 25 lakh CASA accounts during the first half of FY14, but the traction in term deposits outpaced the CASA growth.

    Both Advances and Deposits observe robust growth...
    (Rs m) 2QFY13 % of total 2QFY14 % of total Change
    Advances 1,766,710   2,216,840   25.5%
    Deposits 2,260,950   2,870,290   27.0%
    CASA 689,630 30.5% 810,750 28.2% 17.6%
    Tem deposits 1,571,320 69.5% 2,059,540 71.8% 31.1%
    Credit deposit ratio 78.1%   77.2%    

  • The NII growth; however, did not turn out to be impressive and reported mere 5.6% YoY growth. NIMs for the quarter were recorded at 2.7% down from 3.1% a year ago. Lowering of CASA ratio also impacted NIMs during 2QFY14.

  • The other income growth for the second quarter FY14 grew decently by 12.0% YoY supported largely by treasury gains and recoveries form written off accounts. Whereas for the 1HFY14, the other income performance heightened and recorded whopping 31.9% YoY growth.

  • The operating costs for 2QFY14 shot up with 19.3% YoY spike. Consequently, the cost-income ratio jumped to 52% levels in 2QFY14 form earlier 47% levels in 2QFY13.

  • Provisions proved to be a major drag for the profitability of the bank. The provisioning costs grew as high as 92.3% YoY during 2QFY14 on account of higher provisions for NPAs, followed by FITL provisions and provisions on restructured advances.

  • Consequently, the profits for the quarter declined hugely by 62.5% YoY. The profits for the first half of FY14 too tumbled and were down by 27.9% YoY.

  • A lot has to be blamed to the asset quality of the bank. The NPAs still stand on the higher side and the bank's credit exposure to troubled sectors of the economy such as infrastructure (17.4% share), agri (10.72%), and metals (6.24%) have added to the pain. Maximum NPAs emerged from agri and MSME sector. That said, 2QFY14 marked marginal improvement in gross NPAs of the bank. While the gross NPAs have come down to 3.64% in 2QFY14 from 3.66% in 2QFY13, the net NPAs were up to 2.15% in 2QFY14 from 2.06% in 2QFY13. The provision coverage ratio remains at 60% levels. The restructured pipeline remains and standard restructured accounts amounted to Rs 109.4 bn forming 5% of the total advances.

  • With total capital adequacy at 9.7% levels and tier I at 7.1%, the priority for Union Bank now is to raise capital and fulfill the BASEL III requirements. The bank has already received in-principle approval for of Rs 5 bn for the capital infusion from the government.
What to expect?
At the current price of Rs 121, the stock is valued at 0.4 times our estimated FY16 adjusted book value.

The asset quality may soon start showing signs of improvement with loan upgradations pipeline already in place and the bank's concerted efforts to clean-up the books. However, the provisioning costs may continue to deter the earnings performance of the bank even in second half of FY14. Also, the incumbent capital raising in the near term and requirements for BASEL III implementation may compress the RoEs for the bank.

Margins (NIMs) are expected to remain at current levels of 2.6% as the bank juggles between the fine-tuning of deposit and lending rates. International book may come to rescue in this regard.

Asset quality worries and the rather lower return ratios prompt us to maintain a Hold recommendation on the stock. We believe the investors should wait and watch the shaping up of asset quality in near future before buying into the stock.

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