Union Bank of India - 4QFY2012 Result Update - Angel Broking

For 4QFY2012, Union Bank of India reported strong net profit growth of 29.4% yoy, aided by considerably higher provisioning expenses, higher growth in fee income and lower employee expenses. We recommend a Buy rating on the stock due to its attractive valuations.

Advances growth remains healthy; Slippages normalize: The bank's advances, continuing the trend witnessed in the past few quarters, grew at a healthy pace of 17.8% yoy during 4QFY2012 as well. Deposits growth was relatively moderate, though at 10.1% yoy. Even on the CASA deposits front, growth remained sluggish at 8.4% on a yoy basis. CASA ratio decreased by 49bp yoy to 31.3% (126bp sequentially). Expansion in CD ratio coupled with relatively low growth in CASA led to an increase of 11bp qoq in cost of funds, which offset the 9bp qoq increase in yield on funds, resulting in sequentially flat reported NIM at 3.3% in 4QFY2012. On the asset-quality front, the bank's slippages normalized to Rs.607cr (annualized slippage ratio of 1.6%) from an average quarterly run rate of Rs.890cr over the past four quarters. Gross and net NPA ratios improved by 32bp and 18bp qoq, respectively. Provision coverage ratio (including technical write-offs) dipped by 92bp qoq to 62.2%. The bank restructured advances worth Rs.3,236cr during the quarter, taking the outstanding restructured book to Rs.11,879cr (6.7% of loan book in 4QFY2012 as against 5.5% in 3QFY2012). Out of the total restructured book, the bank has till date witnessed slippages of 10.3%. In terms of restructuring pipeline, the bank expects one discom to be restructured in 1QFY2013 (exposure of ~Rs.1,100cr).

Outlook and valuation: Going ahead, we expect the bank to report reasonable earnings in FY2013, considering the asset quality improvement, as evident from normalization of slippages at 1.5-1.6%, much lower than the average quarterly run rate, minimal profitability impact of a sharp rise in restructuring and further cushion expected from pick-up in recoveries from technically slipped accounts. In our view, Union Bank of India, though structurally among the better large PSU banks, is trading at attractive valuations of 0.7x FY2014E P/ABV, much lower than peers. Hence, we recommend Buy on the stock with a target price of Rs.276.

Source : Equity Bulls

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