Recommendations » India

Union Bank of India 3QFY2013 performance highlights and results update

Contributed by Angel Broking

During 3QFY2013, Union Bank of India (UNBK) reported a moderate operating profit growth of 5.8% yoy, which was in-line with our estimates. While, the earnings grew by a strong 53.5% yoy on a low base, but they were below estimates as the management chose to make higher provisions, in order to improve its PCR. Key highlight from the results was sequentially lower NPA levels, on account of lower slippages, healthy recoveries/upgrades, and higher NPA provisioning as PCR improved by 476bp qoq to 66.2%.

Healthy business growth; NIM declines 7bp sequentially: During 3QFY2013, the bank’s advance book grew by a healthy 19% yoy. Its retail loan book grew at a relatively higher pace of 24.6% yoy, aided by reduced lending rates and waived processing charges across various home and car loan products. Agri advances were higher by 29.4% yoy. Reported CASA ratio improved sequentially by 75bp to 31.3%. Reported NIM came in marginally lower by 7bp to 3.0%. The bank witnessed a moderate 7.5% yoy growth on the non-interest income (excluding treasury) front, largely on account of a 6.5% yoy growth in CEB income and also due to higher recoveries. Slippages came in lower at Rs.677cr (annualized slippage rate of 1.5%), compared to Rs.792cr in 2QFY2013 (annualized slippage rate of 1.8%). Incremental slippages were largely granular in nature except for 3 accounts worth Rs.100cr or more. Going forward, the management has guided for recovering these chunky slippages over the next two quarters. Recoveries/upgrades came in at Rs.453cr, lower than Rs.627cr in 2QFY2013 and Rs.461cr in 1QFY2013. Due to aggressive provisioning, the PCR improved sequentially by 476bp to 66.2% and hence net NPA levels declined sequentially by much higher 11%. The Management has maintained its guidance for gross NPA ratio around 3.0% by FY2013 end. In line with the Management’s guidance, the bank restructured advances worth ~Rs.1,200cr during 3QFY2013 (of which ~Rs.250 came from the steel sector), thereby taking its outstanding restructured book to Rs.10,696cr. The Management has guided for fresh restructuring of around Rs.1,700cr in the next quarter.

Outlook and valuation: We remain watchful of the bank’s performance on the asset quality front, particularly incremental slippages/restructuring and recoveries/upgrades going ahead. At CMP, the stock trades at 0.8x FY2014 ABV, which is below its eight year trading range of 0.9-1.5x and median of1.2x. We recommend an Accumulate rating on the stock with a target price of Rs.286.