3QFY2010 Result Update I Banking

January 28, 2010

Union Bank of India BUY

CMP Rs255
Performance Highlights Target Price Rs313
Union Bank of India reported a Net Profit de-growth of 20.5% yoy, against our Investment Period 15 Months
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 Stock Info
advances was down to 14.6%, while deposit growth was more sedate at 16.5%
Sector Banking
(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 Market Cap (Rs cr) 12,891
from Accumulate.
Beta 0.7
Improving Profitability, with reasonable Asset-Quality: With a narrowing
gap between deposit growth and loan growth, the credit-deposit ratio 52 WK High / Low 291/115
improved by 381bp sequentially to 70.5% in 3QFY2010. On the liability-side, Avg. Daily Volume 210768
high cost deposits (9% and above) came down from Rs45,400cr in
4QFY2009 to Rs13,000cr in 3QFY2010. The Net Interest Margin (NIM) Face Value (Rs) 10
improved by 37bp to 2.71% in 3QFY2010. Non-interest income grew by BSE Sensex 16,307
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 Nifty 4,867
9.1% sequentially to Rs2,092cr, and the ratio of Gross NPA to Advances stood
Reuters Code UNBK.BO
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 Bloomberg Code UNBK@IN
4.4% of the total loans (46% of the Networth), which is in line with the sector
Shareholding Pattern (%)
average. Although the asset-quality is under moderate pressure, the provision
coverage of the bank stood at a healthy 80%. Promoters 55.4

MF/Banks/Indian FIs 18.2

Outlook and Valuation: The bank is structurally among the more profitable
and competitive PSU Banks, with robust traction in CASA deposits, consistency FII/NRIs/OCBs 16.2
in core fee income growth and its fast expanding branch network. Moreover, Indian Public 10.1
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 Abs. (%) 3m 1yr 3yr
than its peers in FY2011E as well. At the CMP, the stock is trading at 5.4x Sensex 0.1 76.1 14.2
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 Union Bank (3.7) 73.6 127.5
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 Vaibhav Agrawal
P/E (x) 7.5 6.4 6.1 5.4 Tel: 022 – 4040 3800 Ext: 333
E-mail: vaibhav.agrawal@angeltrade.com
P/ABV (x) 1.8 1.5 1.3 1.1
RoA (%) 1.2 1.1 1.0 1.0 Amit Rane
Tel: 022 – 4040 3800 Ext: 326
RoE (%) 27.2 25.8 22.4 21.4
E-mail: amitn.rane@angeltrade.com
Source: Company, Angel Research

1
Please refer to important disclosures at the end of this report Sebi Registration No: INB 010996539
 Union Bank of India I 3QFY2010 Result Update

Exhibit 1: 3QFY2010 Performance

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 465 555 (16.3) 392 18.5 1,549 897 72.7
Total Income 1,529 1,419 7.8 1520 0.6 4,279 3,811 12.3
Operating Expenses 615 609 1.1 666 (7.6) 1,767 1,640 7.7
Pre-Prov. Profit 914 810 12.9 855 7.0 2,512 2,171 15.7
Provisions & Cont. 161 135 19.3 -45 458.5 486 454 7.1
PBT 753 675 11.6 900 (16.3) 2,025 1,716 18.0
Prov. for Taxes 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) 10.6 10.0 5.8 13.3 (20.5) 29.3 25.0 17.4
Cost to Income (%) 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
0.0
3QFY2008

4QFY2008

1QFY2009

2QFY2009

3QFY2009

4QFY2009

1QFY2010

2QFY2010

3QFY2010

Advances Growth (% yoy) Deposit Growth (% yoy)

Source: Company, Angel Research

January 28, 2010 2

 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 37 42 (11.9) 27 37.0
Profit on Sale of
Investments 131 218 (39.9) 101 29.7
Profit on Forex
Transactions 83 78 6.4 105 (21.0)
Core Non-Interest Income 214 217 (1.4) 162 32.1
Total Non-Interest Income 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%.

January 28, 2010 3

 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

-
3QFY2008

4QFY2008

1QFY2009

2QFY2009

3QFY2009

4QFY2009

1QFY2010

2QFY2010

3QFY2010
Gross NPA % Net NPA %
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.

January 28, 2010 4

 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
(Rs)

200
150
100
50
0
Sep-02

May-03
Sep-03

May-04
Sep-04

May-05
Sep-05

May-06
Sep-06

May-07
Sep-07

May-08
Sep-08

May-09
Sep-09
Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10
Price 0.3x 0.65x 1x 1.35x 1.7x

Source: Company, Angel Research

January 28, 2010 5

 Union Bank of India I 3QFY2010 Result Update

Income Statement (Rs cr) Ratio Analysis

Y/E March FY2009 FY2010E FY2011E FY2012E Y/E March FY2009 FY2010E FY2011E FY2012E

Net Interest Income 3,814 3,883 4,831 5,461 Profitability Ratios (%)

YoY Growth (%) 23.6 1.8 24.4 13.0 NIMs 2.8 2.3 2.4 2.3

Other Income 1,483 2,017 1,801 2,105 Cost to Income ratio 41.8 41.7 42.2 43.7

YoY Growth (%) 20.3 36.0 -10.7 16.8 RoA 1.2 1.1 1.0 1.0

Operating Income 5,296 5,900 6,632 7,566 RoE 27.2 25.8 22.4 21.4

YoY Growth (%) 22.6 11.4 12.4 14.1 B/S Ratios (%)

Operating Expenses 2,214 2,458 2,802 3,306 CASA ratio 30.1 30.5 30.4 30.3

YoY Growth (%) 39.0 11.0 14.0 18.0 Credit/Deposit ratio 69.6 66.7 66.7 67.3

Pre - Provision Profit 3,082 3,442 3,830 4,260 CAR 11.2 12.9 12.0 12.1

YoY Growth (%) 13.1 11.7 11.3 11.2 - Tier I 6.9 7.5 6.9 7.0

Prov. & Cont. 725 675 937 981 Asset Quality (%)

YoY Growth (%) -16.2 -6.9 38.9 4.6 Gross NPAs 2.0 1.7 1.5 1.3

Profit Before Tax 2,357 2,767 2,893 3,279 Net NPAs 0.3 0.1 0.1 0.1

YoY Growth (%) 26.7 17.4 4.5 13.3 Slippages 1.6 1.7 1.5 1.3

Prov. for Taxation 630 740 773 877 NPA prov. / avg.
0.4 0.4 0.3 0.3
assets
as a % of PBT 26.7 26.7 26.7 26.7 Provision coverage 83.1 91.5 90.9 90.4
PAT 1,727 2,027 2,120 2,403 Per Share Data (Rs)
YoY Growth (%) 24.5 17.4 4.5 13.3 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

Balance Sheet (Rs cr) Valuation Ratios

Y/E March FY2009 FY2010E FY2011E FY2012E P/E (x) 7.5 6.4 6.1 5.4

Share Capital 505 505 505 505 P/ABVPS (x) 1.8 1.5 1.3 1.1
Reserve & Surplus 8,235 9,820 11,466 13,337 Dividend Yield 2.0 2.9 3.1 3.5
Deposits 138,703 167,830 198,040 231,707 DuPont Analysis
Growth (%) 33.5 21.0 18.0 17.0 NII 2.7 2.2 2.3 2.2
Borrowings 3,885 3,727 4,398 5,145
(-) Prov. Exp. 0.5 0.4 0.4 0.4
Tier 2 Capital 4,890 6,846 8,078 9,532
Adj. NII 2.2 1.8 1.8 1.8
Other Liab. & Prov. 4,757 6,053 7,353 8,687
Treasury 0.2 0.3 0.1 0.1
Total Liabilities 160,976 194,780 229,841 268,914
Int. Sens. Inc. 2.4 2.1 1.9 1.8
Cash balances 8,992 8,392 9,902 11,585
Other Inc. 0.6 0.6 0.6 0.6
Bank balances 6,993 7,791 9,194 10,757
Op. Inc. 3.0 2.7 2.5 2.4
Investments 42,997 59,495 70,301 81,040
Opex 1.6 1.4 1.3 1.3
Advances 96,534 111,980 132,136 155,921
PBT 1.4 1.3 1.2 1.1
Growth (%) 29.8 16.0 18.0 18.0

Fixed Assets 2,335 2,741 3,137 3,560 Taxes 0.4 0.4 0.4 0.4

Other Assets 3,124 4,383 5,171 6,051 RoA 1.2 1.1 1.0 1.0

Total Assets 160,976 194,780 229,841 268,914 Leverage 22.5 22.7 22.4 22.2

Growth (%) 29.7 21.0 18.0 17.0 RoE 27.2 25.8 22.4 21.4

January 28, 2010 6

 Union Bank of India I 3QFY2010 Result Update

Research Team Tel: 022 - 4040 3800 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

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Tel : (022) 3952 4568 / 4040 3800

Angel Broking Ltd: BSE Sebi Regn No : INB 010996539 / CDSL Regn No: IN - DP - CDSL - 234 - 2004 / PMS Regn Code: PM/INP000001546 Angel Securities Ltd:BSE: INB010994639/INF010994639 NSE:
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January 28, 2010 7