Union Bank, 4th February, 2013

7/29/2019 Union Bank, 4th February, 2013

1/12

Please refer to important disclosures at the end of this report 1

Pre-prov. profit 1,358 1,273 6.7 1,284 5.8

Source: Company, Angel Research

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, theearnings grew by a strong 53.5% yoy on a low base, but they were belowestimates 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 NPAprovisioning as PCR improved by 476bp qoq to 66.2%.

During 3QFY2013, the

banks advance book grew by a healthy 19% yoy. Its retail loan book grew at arelatively higher pace of 24.6% yoy, aided by reduced lending rates and waivedprocessing charges across various home and car loan products. Agri advances

were higher by 29.4% yoy. Reported CASA ratio improved sequentially by 75bp to31.3%. 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 (excludingtreasury) front, largely on account of a 6.5% yoy growth in CEB income and also

due to higher recoveries. Slippages came in lower at `677cr (annualized slippagerate of 1.5%), compared to `792cr in 2QFY2013 (annualized slippage rate of

1.8%). Incremental slippages were largely granular in nature except for3 accounts worth `100cr or more. Going forward, the management hasguided for recovering these chunky slippages over the next two quarters.

Recoveries/upgrades came in at `453cr, lower than `627cr in 2QFY2013 and

`461cr in 1QFY2013. Due to aggressive provisioning, the PCR improvedsequentially by 476bp to 66.2% and hence net NPA levels declined sequentially

by much higher 11%. The Management has maintained its guidance for grossNPA ratio around 3.0% by FY2013 end. In line with the Managements guidance,

the bank restructured advances worth ~`1,200cr during 3QFY2013 (of which~`250 came from the steel sector), thereby taking its outstanding restructured

book to `10,696cr. The Management has guided for fresh restructuring ofaround `1,700cr in the next quarter.

We remain watchful of the banks performance on theasset quality front, particularly incremental slippages/restructuring andrecoveries/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.

Key financials (standalone)

% chg 48.3 11.1 10.2 18.2

% chg 0.3 (14.2) 12.8 28.9

NIM (%) 3.0 2.8 2.8 2.8

P/E (x) 6.3 7.7 6.8 5.3

P/ABV (x) 1.2 1.1 1.0 0.8

RoA (%) 1.0 0.7 0.7 0.8

RoE (%) 20.9 14.8 14.6 16.6


CMP `249

Target Price `286

Investment Period 12 months

Stock Info

Sector Banking

Market Cap (` cr) 13,695

Beta 1.0

52 Week High / Low 288/150

Avg. Daily Volume 195,185

Face Value (`

) 10BSE Sensex 19,781

Nifty 5,999

Reuters Code UNBK.BO

Bloomberg Code UNBK@IN

Shareholding Pattern (%)

Promoters 54.4

MF / Banks / Indian Fls 20.5

FII / NRIs / OCBs 10.4Indian Public / Others 14.7

Abs. (%) 3m 1yr 3yr

Sensex 6.6 14.3 20.9

UNBK 20.5 6.2 (4.3)

022 3935 7800 Ext: 6808

[email protected]

022 3935 7800 Ext: 6872

[email protected]

Performance Highlights

3QFY2013 Result Update | Banking

February 1, 2013


2/12

Union Bank of India 3QFY2013 Result Update

February 1, 2013 2

Exhibit 1:3QFY2013 performance (standalone)

- on Advances / Bills 4,775 4,581 4.2 4,030 18.5 14,085 11,643 21.0- on investments 1,478 1,432 3.3 1,143 29.3 4,176 3,347 24.7

- on balance with RBI & Others 41 62 (34.2) 112 (63.1) 156 273 (42.7)

- on others 26 35 (26.0) 90 (71.4) 83 138 (40.0)

Other income excl. treasury 528 471 12.0 491 7.4 1,435 1,263 13.6

- Fee Income 344 351 (2.0) 323 6.5 990 873 13.4

- Treasury Income 112 75 49.3 101 10.9 242 314 (22.9)

- Recov. from written off a/cs 109 56 94.6 90 21.1 223 191 16.8

- Others 75 64 16.7 78 (4.5) 222 199 11.4

- Employee expenses 733 679 7.9 701 4.5 2,091 1,884 11.0

- Other Opex 440 445 (1.1) 388 13.5 1,251 1,070 16.9

- Provisions for NPAs 553 354 56.2 425 30.1 1,344 1,285 4.6

- Provisions for Investments 41 (46) - 73 (43.8) 44 163 (73.0)

- Other Provisions 263 179 47.0 475 (44.5) 475 576 (17.5)

Provision for Tax 199 231 (14.0) 114 73.6 667 617 8.0

Effective Tax Rate (%) 39.6 29.4 1024bp 36.7 290bp 32.8 37.8 (508)bp


Exhibit 2:3QFY2013 Actual vs EstimatesNII 1,891 1,925 (1.7)

Other income 640 581 10.0

Operating expenses 1,173 1,158 1.3

Provisions & cont. 857 500 71.4

PBT 501 848 (40.9)

Prov. for taxes 199 275 (27.8)



3/12


February 1, 2013 3

Exhibit 3:3QFY2013 performance analysis (standalone)

Advances (`cr) 185,885 172,901 7.5 156,202 19.0Deposits (`cr) 239,355 226,095 5.9 205,317 16.6

Credit-to-Deposit Ratio (%) 77.7 76.5 119bp 76.1 158bp

Current deposits (`cr) 20,331 15,652 29.9 18,310 11.0

Savings deposits (`cr) 54,470 53,311 2.2 48,500 12.3

CASA deposits (` cr) 74,801 68,963 8.5 66,810 12.0

Reported CASA ratio (%) 31.3 30.5 75bp 32.5 (129)bp

CAR (%) 10.8 11.4 (61)bp 11.7 (94)bp

Tier 1 CAR (%) 7.4 8.2 (77)bp 8.0 (58)bp

Yield on funds 9.1 9.2 (3)bp 9.5 (38)bp

Cost of funds 6.4 6.4 2bp 6.4 (3)bp

Reported NIM 3.0 3.0 (7)bp 3.3 (36)bp

Cost-to-income ratio 46.3 46.9 (55)bp 45.9 44bp

Gross NPAs (` cr) 6,384 6,470 (1.3) 5,209 22.6

Gross NPAs (%) 3.4 3.7 (30)bp 3.3 3bp

Net NPAs (`cr) 3,169 3,559 (11.0) 2,879 10.1

Net NPAs (%) 1.7 2.1 (36)bp 1.9 (18)bp

Provision Coverage Ratio (%) 66.2 61.5 476bp 63.1 307bp

Slippage ratio (%) 1.5 1.8 (26)bp 1.5 2bp

LLP to avg. assets (%) 0.8 0.5 26bp 0.7 8bp


Healthy business growth; NIMs decline 7bp sequentially

During 3QFY2013, the advance book for the bank grew at a healthy pace of 19%

yoy. Aided by reduced lending rates and waived processing charges across various

home and car loan products, the retail loan book for the bank grew at a relatively

higher pace of 24.6% yoy. The bank also witnessed strong traction in its Agri book,

which grew by 29.4% yoy. The Management has maintained its credit growth

guidance for FY2013E at ~16-17% yoy.

On the deposits front, the bank witnessed a healthy growth of 16.6% yoy. CASA

deposits grew by 12.0% yoy, on back of 11.0% yoy growth in current deposits and

12.3% yoy growth in saving deposits. Reported CASA ratio for the bank improved

sequentially by 75bp to 31.3%. As of 3QFY2013, the share of high cost deposits

(incl. CDs) for the bank stood at around 10.5%, well within the regulatory

requirement.

Yield on advances for the bank came off sequentially by 5bp, as the bank had

reduced lending rates in certain categories of retail, SME and agri advances. Yield

on investments remained stable sequentially at 7.38%. Hence, the overall yield on

funds was lower marginally by 3bp sequentially. Cost of funds inched up slightly by

2bp qoq. The reported NIM for the bank came in marginally lower by 7bp to

3.0%. Going forward, the Management expects the NIMs for the bank to stabilize

at around 3.0%.


4/12


February 1, 2013 4

Exhibit 4:Business growth picks up in 3QFY2013


Exhibit 5:CASA ratio improves sequentially


Exhibit 6:3bp fall in YoF, coupled with 2bp higher CoF...


Exhibit 7:...results in 7bp sequential fall in NIMs


Moderate growth in non-interest income (excl. treasury)

During 3QFY2013, the bank witnessed a moderate growth of 7.5% yoy on the

non-interest income (excluding treasury) front, which was largely on account of a

6.5% yoy growth in income from the commission, exchange and brokerage (CEB)

segment and also due to higher recoveries. Recoveries on written-off accounts

came in at `109cr, registering a growth of 21.1% yoy, while income from treasury

segment grew by 10.9% yoy to`

112cr. The overall other income for the bank grewby a moderate 8.1% yoy to `640cr.

Exhibit 8:Moderate growth in Non-interest income (excl. treasury)CEB 344 351 (2.0) 323 6.5

Treasury 112 75 49.3 101 10.9

Recoveries 109 56 94.6 90 21.1

Others 75 64 17.2 78 (3.8)

Other income excl. treasury 528 471 12.1 491 7.5


16.8

17.8

19.5

17.4

19.0

10.0

10.1

11.5

15.6

16.6

76.1

79.8

78.3

76.5

77.7

74.0

76.0

78.0

80.0

82.0

-

10.0

20.0

30.0

3QFY12 4QFY12 1QFY13 2QFY13 3QFY13

Adv. yoy chg (%) Dep. yoy chg (%) CDR (%, RHS)

32.5

31.3

30.9

30.5

31.3

7.68.4

9.6 9.9

12.0

-

10.0

20.0

29.0

30.0

31.0

32.0

33.0

34.0


CASA ratio (%) CASA yoy growth (%, RHS)

9.51

9.71

9.34

9.16 9.13

8.50

9.00

9.50

10.00


(%)

3.313.26

3.01 3.022.95

2.70

2.90

3.10

3.30

3.50


(%)


5/12


February 1, 2013 5

Lower slippages, healthy recoveries/upgrades and higher

provisioning resulted in sequentially lower NPA levels

During 3QFY2013, slippages for the bank came in lower at `677cr (annualized

slippage rate of 1.5%), compared to `792cr in 2QFY2013 (annualized slippage

rate of 1.8%). Incremental slippages were largely granular in nature except for 3

accounts worth `100cr or more. Going forward, the Management has guided for

recovering these chunky slippages (3 accounts worth `100cr or more) over the next

two quarters. Recoveries/upgrades during the quarter came in at `453cr, lower

than `627cr in 2QFY2013 and `461cr in 1QFY2013.

Healthy recoveries/upgrades coupled with lower slippages, resulted in a sequential

decline in gross NPA levels, on an absolute basis, by 1.3%. Due to aggressive

provisioning, the PCR improved sequentially by 476bp to 66.2% and hence net

NPA levels declined sequentially by a much higher 11%. The Management has

maintained its guidance for 70% PCR by the next two quarters. Gross and net NPA

ratios declined on a sequential basis by 30bp and 36bp, to 3.4% and 1.7%,

respectively. The Management reiterated its guidance for gross NPA ratio to be

around 3.0% by FY2013 end.

In line with the Managements guidance, the bank restructured advances worth

~`1,200cr during 3QFY2013 (of which ~`250 came from the steel sector),

thereby taking its outstanding restructured book to `10,696cr. The Management

has guided for fresh restructuring of around `1,700cr in the next quarter.

Exhibit 9:Slippages remain at normalised levels


Exhibit 10:NPA ratios improve sequentially


1.5

1.6

3.7

1.8

1.5

0.7

0.4

0.7

0.5

0.8

-

0.3

0.6

0.9

-

1.5

3.0

4.5


Slippages (%) Credit cost (%, RHS)

3.3

3.0

3.8

3.7

3.4

1.9

1.7

2.2

2.1

1.7

63.162.2

59.0

61.5

66.2

50.0

55.0

60.0

65.0

70.0

-

1.0

2.0

3.0

4.0


Gross NPAs (%) Net NPAs (%) PCR (%, RHS)


6/12


February 1, 2013 6

Exhibit 11:Steady network expansion continues


Exhibit 12:Cost ratios remain stable sequentially


3,1

77

3,2

01

3,2

39

3,3

11

3,3

95

3,025

3,801

4,139 4,1854,300

2,000

2,300

2,600

2,900

3,200

3,500

3,800

4,100

4,400

4,700

3,000

3,100

3,200

3,300

3,400

3,500


Branches ATMs (RHS)

45.9

39.3

45.2

46.9

46.3

1.81.6 1.6

1.7 1.7

-

0.4

0.8

1.2

1.6

2.0

-

10.0

20.0

30.0

40.0

50.0


Cost-to-income ratio (%) Opex to average assets (%, RHS)


7/12


February 1, 2013 7

Investment argument

Incremental slippages/restructuring and recoveries/upgrades

remain the key monitorable going ahead

The bank witnessed heavy slippages during the switchover to system based NPA

recognition (during 2QFY2012). Although higher recoveries were expected post

the complete switchover, the recoveries remained moderate in 2HFY2012. During

9MFY2013, recoveries/upgrades were higher and the bank has witnessed reduced

non-chunky slippages. Performance on the asset quality front, particularly in terms

of incremental slippages/restructuring and recoveries/upgrades, in our view,

remains the key monitorable for the bank, in the near term.

Outlook and valuation

We remain watchful of the banks performance on the asset quality front,

particularly incremental slippages/restructuring and recoveries/upgrades going

ahead. At CMP, the stock trades at a valuation of 0.8x FY2014 ABV, which is

below its eight year trading range of 0.9-1.5x and median of 1.2x.

Exhibit 13:Key assumptions

Credit growth 12.0 15.0 15.0 15.0

Deposit growth 14.0 17.0 14.0 17.0

CASA ratio 30.7 29.8 31.0 30.1

NIMs 2.8 2.9 2.8 2.8

Other income growth (0.3) 10.2 2.6 6.8

Growth in staff expenses 15.0 15.0 15.0 14.0

Growth in other expenses 12.0 12.0 14.0 12.0

Slippages 2.7 2.5 2.2 2.1

Coverage ratio 64.0 67.5 70.0 75.0


Exhibit 14:Change in estimates

NII 7,638 7,612 (0.3) 8,975 9,001 0.3

Non-interest income 2,325 2,394 3.0 2,561 2,557 (0.2)

Operating expenses 4,540 4,571 0.7 5,171 5,176 0.1

Provisions & cont. 2,084 2,452 17.7 2,537 2,536 (0.0)

PBT 3,339 2,984 (10.6) 3,829 3,846 0.5

Prov. for taxes 1,083 968 (10.6) 1,242 1,248 0.5



8/12


February 1, 2013 8

Exhibit 15:P/ABV band


0

100

200

300

400

500

600

A

pr-06

S

ep-0

6

F

eb-0

7

Jul-07

D

ec-0

7

M

ay-0

8

O

ct-08

M

ar-09

A

ug-0

9

J

an-1

0

J

un-1

0

N

ov-1

0

A

pr-11

S

ep-1

1

F

eb-1

2

Jul-12

D

ec-1

2

Price (`) 0.7x 1x 1.3x 1.6x 1.9x


9/12


February 1, 2013 9

Exhibit 16: Recommendation summary

AxisBk Buy 1,508 1,753 16.2 2.0 2.4 10.8 16.4 1.6 20.1

FedBk Accumulate 511 557 8.9 1.2 1.4 9.9 6.4 1.2 13.1

HDFCBk Neutral 640 - - 3.6 - 17.7 28.1 1.8 22.1

ICICIBk* Buy 1,171 1,404 19.9 1.9 2.2 13.8 22.8 1.5 15.9

SIB Buy 28 34 21.9 1.1 1.4 6.8 6.9 1.0 17.7

YesBk Accumulate 532 576 8.4 2.7 2.9 12.5 24.1 1.5 23.6

AllBk Buy 160 188 18.0 0.7 0.8 4.8 (5.2) 0.8 14.7

AndhBk Neutral 111 - - 0.8 - 5.1 (4.6) 0.8 13.8

BOB Neutral 867 - - 1.0 - 6.3 6.5 1.0 17.1

BOI Accumulate 354 380 7.4 0.9 1.0 5.4 18.2 0.8 16.0

BOM Neutral 59 - - 0.7 - 4.5 44.3 0.6 16.9

CanBk Accumulate 472 516 9.2 0.9 1.0 5.9 4.1 0.8 14.7CentBk Neutral 83 - - 0.7 - 4.1 95.5 0.5 14.3

CorpBk Buy 428 517 20.7 0.7 0.8 4.3 (3.1) 0.8 14.8

DenaBk Buy 108 132 22.6 0.7 0.8 4.4 3.5 0.8 15.9

IDBI# Buy 106 122 15.1 0.7 0.8 4.7 18.4 0.9 14.1

IndBk Buy 203 245 20.9 0.7 0.9 4.7 4.4 1.1 16.8

IOB Accumulate 80 88 10.2 0.5 0.6 4.0 23.9 0.6 13.4

J&KBk Neutral 1,377 - - 1.2 - 7.0 9.2 1.4 18.0

OBC Neutral 322 - - 0.7 - 5.4 23.2 0.8 13.5

PNB Buy 899 1,053 17.1 0.9 1.1 5.4 8.0 1.0 17.5

SBI* Accumulate 2,410 2,600 7.9 1.6 1.7 9.4 21.5 1.0 17.7

SynBk Buy 133 157 17.5 0.7 0.9 4.8 12.4 0.7 16.4

UcoBk Neutral 75 - - 0.8 - 5.0 2.6 0.5 13.5

UtdBk Buy 74 87 17.5 0.5 0.6 3.4 19.6 0.7 16.1

VijBk Accumulate 58 62 6.8 0.7 0.7 5.3 9.7 0.5 12.6

Source: Company, Angel Research; Note:*Target multiples=SOTP Target Price/ABV (including subsidiaries), #Without adjusting for SASF

Company Background

Union Bank of India (UNBK) is the seventh largest public sector bank, with a

balance sheet size of over `2.8lakh cr. The bank has a reasonably large pan-India

presence with nearly 3,400 branches and 4,300 ATMs. The bank was one of the

early adopters of core banking technology amongst PSU banks.


10/12


February 1, 2013 10

- YoY Growth (%) 23.6 9.9 48.3 11.1 10.2 18.2

- YoY Growth (%) 20.3 33.2 3.2 14.4 2.6 6.8

- YoY Growth (%) 22.6 16.4 33.9 11.9 8.3 15.5

- YoY Growth (%) 39.0 13.3 57.5 0.9 14.6 13.2

- YoY Growth (%) 13.1 18.7 17.6 22.0 3.5 17.4

- YoY Growth (%) (16.2) 13.9 63.3 88.3 (3.5) 3.4

- YoY Growth (%) 26.7 20.2 4.3 (8.2) 10.0 28.9

- as a % of PBT 26.7 26.8 29.6 34.1 32.4 32.4

- YoY Growth (%) 24.5 20.2 0.3 (14.2) 12.8 28.9

Share Capital 505 505 635 662 662 662Reserves & Surplus 8,235 9,919 12,129 13,972 15,528 17,540

Deposits 138,703 170,040 202,461 222,869 254,071 297,263

- Growth (%) 33.5 22.6 19.1 10.1 14.0 17.0

Borrowings 3,885 3,125 7,126 11,719 18,105 21,058

Tier 2 Capital 4,890 6,090 6,190 6,190 6,035 5,884

Other Liab & Prov. 4,757 5,483 7,443 6,800 7,346 8,553

Cash balances 8,992 12,468 17,610 11,634 11,433 11,891

Bank balances 6,993 3,308 2,488 4,042 4,651 5,409

Investments 42,997 54,404 58,399 62,364 73,940 90,175

Advances 96,534 119,315 150,986 177,882 204,564 235,249

- Growth (%) 29.8 23.6 26.5 17.8 15.0 15.0

Fixed Assets 2,335 2,305 2,293 2,336 2,607 2,942

Other Assets 3,124 3,361 4,208 3,955 4,551 5,293

- Growth (%) 29.7 21.2 20.9 11.1 15.1 16.3


11/12


February 1, 2013 11

NIMs 2.8 2.4 3.0 2.8 2.8 2.8Cost to Income Ratio 41.8 40.7 47.8 43.1 45.7 44.8

RoA 1.2 1.2 1.0 0.7 0.7 0.8

RoE 27.2 26.2 20.9 14.8 14.6 16.6

CASA Ratio 30.1 31.7 31.8 31.3 31.0 30.1

Credit/Deposit Ratio 69.6 70.2 74.6 79.8 80.5 79.1

CAR 12.0 12.5 13.0 11.9 11.1 10.4

- Tier I 7.4 7.9 8.7 8.4 8.0 7.8

Gross NPAs 2.0 2.2 2.4 3.0 3.2 3.8

Net NPAs 0.3 0.8 1.2 1.7 1.4 1.3

Slippages 1.6 1.8 2.4 2.5 2.2 2.1

Loan Loss Prov./Avg. Assets 0.4 0.4 0.6 0.6 0.6 0.7

Provision Coverage 83.1 74.0 67.6 62.2 70.0 75.0

EPS 34.2 41.1 39.6 32.2 36.4 47.0

ABVPS 139.7 173.6 203.4 217.3 255.4 300.7

DPS 5.0 5.5 8.0 8.0 7.0 9.0

PER (x) 7.3 6.1 6.3 7.7 6.8 5.3

P/ABVPS (x) 1.8 1.4 1.2 1.1 1.0 0.8

Dividend Yield 2.0 2.2 3.2 3.2 2.8 3.6

NII 2.7 2.4 2.9 2.8 2.7 2.8

(-) Prov. Exp. 0.5 0.5 0.6 1.0 0.9 0.8

Adj. NII 2.2 1.9 2.3 1.8 1.8 2.0

Treasury 0.2 0.3 0.2 0.2 0.1 0.1

Int. Sens. Inc. 2.4 2.2 2.5 1.9 1.9 2.0

Other Inc. 0.8 0.8 0.7 0.8 0.7 0.7

Op. Inc. 3.2 3.0 3.2 2.7 2.7 2.8

Opex 1.6 1.4 1.8 1.6 1.6 1.6PBT 1.7 1.6 1.4 1.1 1.1 1.2

Taxes 0.4 0.4 0.4 0.4 0.3 0.4

RoA before pref. div. 1.2 1.2 1.0 0.7 0.7 0.8

Pref. div. - - 0.0 0.0 0.0 0.0

Leverage (x) 22.5 22.5 21.7 20.7 20.5 21.0


12/12


February 1 2013 12

Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com

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Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to -15%) Sell (< -15%)

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Documents

Union Bank, 4th February, 2013