Union Bank of India 3QFY2014 performance highlights and results update
February 6, 2014, Thursday, 06:11 GMT | 01:11 EST | 11:41 IST | 14:11 SGT
Union Bank of India (UNBK) reported a weak operating performance for 3QFY2014, with an operating profit de-growth of 7.1% yoy, which was in line with our estimates. Key highlights from the results were a muted NII growth of 3.8% (much lower compared to 20.0% yoy advance growth), margin decline of 4bp qoq and continued pressures on the asset quality front, as stressed assets addition remained at elevated levels.
NIM declines 4bp qoq; Asset quality witnesses continued pain: During 3QFY2014, the bank’s business grew at a healthy pace of around 20.0% yoy. MSME and Retail loan books continue to witness robust traction and grew at 29.5% and 28.1% yoy, respectively. CASA deposits grew at a relatively moderate pace of 9.8% yoy, much lower than peers and the CASA ratio declined by 245bp yoy to 28.8%. Reported NIMs declined 4bp qoq to 2.5%, as a 20bp increase in the cost of funds was higher than the 17bp increase in yields. The bank registered a healthy 15.5% yoy growth in non-interest income (excl. treasury), largely aided by strong growth of 75.6% yoy in forex income. CEB income growth was healthy at 14.0% yoy to Rs.392cr. During the quarter, the bank witnessed continued asset quality pain, as addition of stressed assets (slippages and incremental restructuring) remained at elevated levels though came in lower sequentially. Slippages came in at Rs.1,154cr compared to Rs.1,657cr in 2QFY2014. Recoveries/upgrades came in lower sequentially at Rs.265cr, as against an average quarterly run-rate of Rs.435cr over last few quarters. Even as slippages were lower sequentially, lower recoveries/upgrades and write-offs resulted in 8.9% qoq increase in Gross NPA levels. PCR declined marginally by 46bp qoq to 60.0%. Absolute Net NPA levels too witnessed a qoq increase of 8.1%. The bank restructured advances worth Rs.1,004cr during the quarter (vs Rs.1,534cr in 2QFY2014), of which around Rs.640cr was on account of discom restructuring under the FRP. As per the Management, the restructuring pipeline stands at ~Rs.2,000cr in the next quarter.
Outlook and valuation: UNBK has witnessed continued asset quality pressures for several quarters over the last few years, which has severely impacted its profitability. The RoE for the bank has declined significantly from 20.9% in FY2011 to 8.9% as of 1HFY2014, impacted by higher credit costs and lower margins. Its Tier I CAR is also relatively low at 6.8% (CET-1 at 6.3%), which coupled with current moderate return ratios, is likely to result in book dilutive capital raising/lower growth. Hence, we maintain our Neutral rating on the stock.