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Union Bank of India Performance Highlights Union Bank of India reported a Net Prof it

Union Bank of India

Performance Highlights

Union Bank of India reported a Net Profit de-growth of 20.5% yoy, against our estimate of a 34% de-growth, on account of higher-than-expected net interest income and non-interest income. Reflecting sectoral trends, the yoy growth in advances was down to 14.6%, while deposit growth was more sedate at 16.5% (28.6% in 2QFY2010). Strong improvement in NIMs, with reasonable asset-quality was the key positive from the results. We upgrade the stock to Buy from Accumulate.

Improving Profitability, with reasonable Asset-Quality: With a narrowing gap between deposit growth and loan growth, the credit-deposit ratio improved by 381bp sequentially to 70.5% in 3QFY2010. On the liability-side, high cost deposits (9% and above) came down from Rs45,400cr in 4QFY2009 to Rs13,000cr in 3QFY2010. The Net Interest Margin (NIM) improved by 37bp to 2.71% in 3QFY2010. Non-interest income grew by 18.5% yoy to reach Rs465cr in 3QFY2010, with core fee income and treasury gains constituting 46.0% and 28.2%, respectively. Gross NPAs increased by 9.1% sequentially to Rs2,092cr, and the ratio of Gross NPA to Advances stood at 2.0% (from 1.9% in 2QFY2010). The bank’s cumulative restructured loans (under the facility-wise method of classification) stood at Rs4,711cr, forming 4.4% of the total loans (46% of the Networth), which is in line with the sector average. Although the asset-quality is under moderate pressure, the provision coverage of the bank stood at a healthy 80%.

Outlook and Valuation: The bank is structurally among the more profitable and competitive PSU Banks, with robust traction in CASA deposits, consistency in core fee income growth and its fast expanding branch network. Moreover, given the traction in the bank’s retail deposit franchise, driven by branch expansion, we expect the bank’s performance on the NII front to be better than its peers in FY2011E as well. At the CMP, the stock is trading at 5.4x FY2012E EPS of Rs47.6 and 1.1x FY2012E Adjusted Book Value of Rs240.7. We upgrade the stock to Buy from Accumulate, with a 15-month Target Price of Rs313, indicating an annualised return of 17.8%.

Key Financials

Y/E March

FY2009

FY2010E

FY2011E

FY2012E

NII

3,814

3,883

4,831

5,461

% chg

23.6

1.8

24.4

13.0

Net Profit

1,727

2,027

2,120

2,403

% chg

24.5

17.4

4.5

13.3

NIM (%)

2.8

2.3

2.4

2.3

EPS (Rs)

34.2

40.1

42.0

47.6

P/E (x)

7.5

6.4

6.1

5.4

P/ABV (x)

1.8

1.5

1.3

1.1

RoA (%)

1.2

1.1

1.0

1.0

RoE (%)

27.2

25.8

22.4

21.4

Source: Company, Angel Research

3QFY2010 Result Update I Banking

January 28, 2010

BUY

 

CMP

Rs255

Target Price

Rs313

Investment Period

15 Months

Stock Info

Sector

Banking

Market Cap (Rs cr)

12,891

Beta

0.7

52 WK High / Low

291/115

 

Avg. Daily Volume

210768

Face Value (Rs)

10

BSE Sensex

16,307

Nifty

4,867

Reuters Code

UNBK.BO

 

Bloomberg Code

UNBK@IN

Shareholding Pattern (%)

 

Promoters

55.4

MF/Banks/Indian FIs

 

18.2

FII/NRIs/OCBs

16.2

Indian Public

10.1

Abs. (%)

3m

1yr

3yr

Sensex

0.1

76.1

14.2

Union Bank

(3.7)

73.6

127.5

Vaibhav Agrawal

Tel: 022 – 4040 3800 Ext: 333 E-mail: vaibhav.agrawal@angeltrade.com

Amit Rane

Tel: 022 – 4040 3800 Ext: 326 E-mail: amitn.rane@angeltrade.com

Exhibit 1: 3QFY2010 Performance Union Bank of India I 3QFY2010 Result Update Y/E March (Rs

Exhibit 1: 3QFY2010 Performance

Union Bank of India I 3QFY2010 Result Update

Y/E March (Rs cr)

3QFY10

2QFY10

% chg (qoq)

3QFY09

% chg (yoy)

9MFY10

9MFY09

% chg

Interest Earned

3,294

3,206

2.7

3262

1.0

9,674

8,626

12.2

Interest Expenses

2,229

2,342

(4.8)

2133

4.5

6,945

5,712

21.6

Net Interest Income

1,065

863

23.3

1128

(5.6)

2,730

2,914

(6.3)

Non-Interest Income Total Income Operating Expenses Pre-Prov. Profit Provisions & Cont. PBT Prov. for Taxes

465

555

(16.3)

392

18.5

1,549

897

72.7

1,529

1,419

7.8

1520

0.6

4,279

3,811

12.3

615

609

1.1

666

(7.6)

1,767

1,640

7.7

914

810

12.9

855

7.0

2,512

2,171

15.7

161

135

19.3

-45

458.5

486

454

7.1

753

675

11.6

900

(16.3)

2,025

1,716

18.0

219

170

28.8

228

(3.9)

544

455

19.6

PAT

534

505

5.8

672

(20.5)

1,481

1,261

17.4

EPS (Rs) Cost to Income (%)

10.6

10.0

5.8

13.3

(20.5)

29.3

25.0

17.4

40.2

42.9

43.8

41.3

43.0

Effective Tax Rate (%)

29.1

25.2

25.3

26.9

26.5

Net NPAs (%)

0.6

0.2

0.1

0.6

0.1

Source: Company, Angel Research

The gap between deposit growth and loan growth narrows

The Bank’s loans registered a 14.6% growth yoy, while deposits grew by 16.5% yoy (down from a 28.6% yoy growth in 2QFY2010). As a result, the credit-deposit ratio improved by 381bp sequentially to 70.5% in 3QFY2010. The management has maintained its growth guidance for loans to 18% by the end of the year. We are presently factoring in a 16% loan growth for FY2010E. On a positive note, on the liability-side, high cost deposits (9% and above) have come down from Rs45,400cr in 4QFY2009 to Rs13,000cr in 3QFY2010. The bank’s CASA ratio was stable at 32.3% (32.9% in 2QFY2010), registering a reasonable yoy growth of 24.1%. As a result of these factors, the Net Interest Margin (NIM) improved by 37bp to 2.71% in 3QFY2010.

Exhibit 2: Trend in Advances & Deposits 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0
Exhibit 2: Trend in Advances & Deposits
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
Advances Growth (% yoy)
Deposit Growth (% yoy)
3QFY2008
4QFY2008
1QFY2009
2QFY2009
3QFY2009
4QFY2009
1QFY2010
2QFY2010
3QFY2010

Source: Company, Angel Research

Union Bank of India I 3QFY2010 Result Update Strong sequential NII Growth The Net Interest

Union Bank of India I 3QFY2010 Result Update

Strong sequential NII Growth

The Net Interest Income increased 23.3% sequentially and declined 5.6% yoy to Rs1,065cr in 3QFY2010. However, going forward, with an improving CASA ratio and a reduction in the proportion of high-cost deposits, coupled with an improvement in the underlying credit demand in 4QFY2010 driving an improving Credit/Deposit ratio, we expect the NIM to remain stable. Moreover, given the traction in the bank’s retail deposit franchise, driven by branch expansion, we expect the bank’s performance on the NII front to be better than its peers in FY2011E as well.

Exhibit 3: NIMs, Spreads

Period (%)

3QFY09

2QFY10

3QFY10

Yield on Funds

9.32

7.95

7.96

Cost of Funds

6.10

5.81

5.39

Net Interest margin

3.22

2.34

2.71

Source: Company, Angel Research

Non-interest Income Growth driven by Treasury Gains

Non-interest income grew by 18.5% yoy to reach Rs465cr in 3QFY2010, with core fee income and treasury gains constituting 46.0% and 28.2%, respectively. The profit on forex transactions declined by 20.9% yoy to Rs83cr. We expect the core non- interest income of the bank to be largely in-line with the loan growth during

FY2010-2012E.

Exhibit 4: Composition of Non-Interest Income

Period (Rs cr)

3QFY10

2QFY10

% chg

3QFY09

% chg

 

qoq

yoy

Recovery of Bad Debts Profit on Sale of Investments Profit on Forex Transactions Core Non-Interest Income Total Non-Interest Income

37

42

(11.9)

27

37.0

131

218

(39.9)

101

29.7

83

78

6.4

105

(21.0)

214

217

(1.4)

162

32.1

465

555

(16.2)

395

17.7

Source: Company, Angel Research

Costs remain in check

During 3QFY2010, the cost-to-income ratio improved to 40.2% from 42.9% in 2QFY2010, in line with our expectations. The total operating expenses declined by 7.6% yoy and rose marginally on a sequential basis. The bank opened 55 branches and 122 ATMs, to take the total to 2,876 and 2,249, respectively. The bank aims to maintain a long-term cost-to-income ratio of 42%.

Union Bank of India I 3QFY2010 Result Update Asset Quality Pressure seen, but reasonable coverage

Union Bank of India I 3QFY2010 Result Update

Asset Quality Pressure seen, but reasonable coverage

The bank’s cumulative restructured loans (under the facility-wise method of classification) stood at Rs4,711cr, forming 4.4% of the total loans (46% of the Networth), which is in line with the sector average. Gross NPAs increased by 9.1% sequentially to Rs2,092cr, and the ratio of Gross NPA to Advances stood at 2.0% (from 1.9% in 2QFY2010). The bank has utilised write-offs to report the provision coverage as per the new guidelines issued by the RBI. The gross slippages during the quarter were at Rs472cr (2.0% annualised slippage ratio). During 9MFY2010, 22 restructured accounts were converted into NPAs, amounting to Rs231cr (about 4.9% of the restructured advances at the end of 3QFY2010). Thus, the provision coverage ratio stood at 80%, and has come down from the 88.0% level in 2QFY2010, without technical write-offs. The coverage ratio still remained at a comfortable level as compared to the industry average.

Exhibit 5: Trend in Asset Quality 2.50 2.00 1.50 1.00 0.50 - Gross NPA %
Exhibit 5: Trend in Asset Quality
2.50
2.00
1.50
1.00
0.50
-
Gross NPA %
Net NPA %
3QFY2008
4QFY2008
1QFY2009
2QFY2009
3QFY2009
4QFY2009
1QFY2010
2QFY2010
3QFY2010

Source: Company, Angel Research

Higher Provisions for Investments

Provisions increased by 459% yoy to Rs161cr, mainly on account of lower NPA provisions and the presence of write-backs of Rs291cr in investment depreciation during 3QFY2009. During 3QFY2009, the bank had provided Rs166cr towards standard assets and NPAs (as against Rs50cr provided during 3QFY2010). The bank’s AFS portfolio constituted 28% of its Investment book, with a moderate modified duration of 1.9 years (down from 2.6 years at the end of 2QFY2010). However, the overall modified duration was high, at 4.5 years.

Capital Adequacy

The Capital Adequacy Ratio (CAR) of the bank stood at 13.5%, with Tier-1 Capital of 8.7%. The bank has also approached the Government for an infusion of Rs1,800cr to meet its expansion plans; Union Bank plans to launch an asset-management company in FY2011E.

Union Bank of India I 3QFY2010 Result Update Outlook and Valuation In our view, the

Union Bank of India I 3QFY2010 Result Update

Outlook and Valuation

In our view, the bank is structurally among the more profitable and competitive PSU Banks. We have a positive outlook on the bank, due to its dynamic leadership, robust traction in CASA deposits, consistency in core fee income growth and its fast expanding branch network. We believe that the NIMs of the bank have bottomed out from 2QFY2010 and will continue to improve in the coming quarters, as deposits get re-priced downwards and the credit deposit ratio improves. Moreover, given the traction in the bank’s retail deposit franchise, driven by branch expansion, we expect the bank’s performance on the NII front to be better than its peers in FY2011E as well. At the CMP, the stock is trading at 5.4x FY2012E EPS of Rs47.6 and 1.1x FY2012E Adjusted Book Value of Rs240.7. We upgrade the stock to Buy from Accumulate, with a 15-month Target Price of Rs313, indicating an annualised return of 17.8%.

Exhibit 6: P/ABV Band – Union Bank of India 400 350 300 250 200 150
Exhibit 6: P/ABV Band – Union Bank of India
400
350
300
250
200
150
100
50
0
Price
0.3x
0.65x
1x
1.35x
1.7x
(Rs)
Sep-02
Jan-03
May-03
Sep-03
Jan-04
May-04
Sep-04
Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10

Source: Company, Angel Research

Union Bank of India I 3QFY2010 Result Update Income Statement (Rs cr)   Y/E March

Union Bank of India I 3QFY2010 Result Update

Income Statement (Rs cr)

 

Y/E March

FY2009

FY2010E

FY2011E

FY2012E

Net Interest Income

3,814

3,883

4,831

5,461

YoY Growth (%)

22.6

11.4

12.4

14.1

Prov. & Cont.

725

675

937

981

PAT

1,727

2,027

2,120

2,403

YoY Growth (%)

24.5

17.4

4.5

13.3

Balance Sheet (Rs cr)

Y/E March

FY2009

FY2010E

FY2011E

FY2012E

505

505

505

505

8,235

9,820

11,466

13,337

Share Capital Reserve & Surplus Deposits Growth (%) Borrowings Tier 2 Capital Other Liab. & Prov.

138,703

167,830

198,040

231,707

 

33.5

21.0

18.0

17.0

3,885

3,727

4,398

5,145

4,890

6,846

8,078

9,532

4,757

6,053

7,353

8,687

Total Liabilities

160,976

194,780

229,841

268,914

Cash balances

8,992

8,392

9,902

11,585

Bank balances

6,993

7,791

9,194

10,757

Investments

42,997

59,495

70,301

81,040

Advances

96,534

111,980

132,136

155,921

Growth (%)

29.8

16.0

18.0

18.0

Fixed Assets

2,335

2,741

3,137

3,560

Other Assets

3,124

4,383

5,171

6,051

Total Assets

160,976

194,780

229,841

268,914

Growth (%)

29.7

21.0

18.0

17.0

G r o w t h ( % ) 29.7 21.0 18.0 17.0 Ratio Analysis Y/E

Ratio Analysis

Y/E March

FY2009

FY2010E

FY2011E

FY2012E

Profitability Ratios (%)

NIMs

2.8

2.3

2.4

2.3

Cost to Income ratio

41.8

41.7

42.2

43.7

RoA

1.2

1.1

1.0

1.0

RoE

27.2

25.8

22.4

21.4

B/S Ratios (%)

CASA ratio

30.1

30.5

30.4

30.3

Credit/Deposit ratio

69.6

66.7

66.7

67.3

CAR

11.2

12.9

12.0

12.1

- Tier I

6.9

7.5

6.9

7.0

Asset Quality (%)

Gross NPAs

Net NPAs

Slippages

NPA prov. / avg. assets

Provision coverage

2.0

1.7

1.5

1.3

0.3

0.1

0.1

0.1

1.6

1.7

1.5

1.3

0.4

0.4

0.3

0.3

83.1

91.5

90.9

90.4

Per Share Data (Rs)

EPS

34.2

40.1

42.0

47.6

ABVPS (75% Cover)

139.7

171.0

203.6

240.7

DPS

5.0

7.5

8.0

9.0

Valuation Ratios

P/E (x)

7.5

6.4

6.1

5.4

P/ABVPS (x)

1.8

1.5

1.3

1.1

Dividend Yield

2.0

2.9

3.1

3.5

DuPont Analysis

NII

2.7

2.2

2.3

2.2

(-) Prov. Exp.

0.5

0.4

0.4

0.4

Adj. NII

2.2

1.8

1.8

1.8

Treasury

0.2

0.3

0.1

0.1

Int. Sens. Inc.

2.4

2.1

1.9

1.8

Other Inc.

0.6

0.6

0.6

0.6

Op. Inc.

3.0

2.7

2.5

2.4

Opex

1.6

1.4

1.3

1.3

PBT

1.4

1.3

1.2

1.1

Taxes

0.4

0.4

0.4

0.4

RoA

1.2

1.1

1.0

1.0

Leverage

22.5

22.7

22.4

22.2

RoE

27.2

25.8

22.4

21.4

RoA 1.2 1.1 1.0 1.0 Leverage 22.5 22.7 22.4 22.2 RoE 27.2 25.8 22.4 21.4

January 28, 2010

6

Research Team Tel: 022 - 4040 3800 DISCLAIMER Union Bank of India I 3QFY2010 Result

Research Team Tel: 022 - 4040 3800

DISCLAIMER

Union Bank of India I 3QFY2010 Result Update

E-mail: research@angeltrade.com

Website: www.angeltrade.com

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Disclosure of Interest Statement

Union Bank of India

1. Analyst ownership of the stock

No

2. Angel and its Group companies ownership of the stock

No

3. Angel and its Group companies’ Directors ownership of the stock

No

4. Broking relationship with company covered

No

No 4. Broking relationship with company covered No Address: Acme Plaza, ‘A’ Wing, 3rd Floor, M.V.

Address: Acme Plaza, ‘A’ Wing, 3rd Floor, M.V. Road, Opp. Sangam Cinema, Andheri (E), Mumbai - 400 059. Tel : (022) 3952 4568 / 4040 3800