Union Bank of India - Q4FY12 Result update - Centrum

Signs of normalcy returning

UBI's Q4FY12 bottomline came in way ahead of our and consensus expectations led by positive surprise on non-interest income (recoveries primarily) and lower staff costs. There are some signs of normalcy returning with 1) NIM largely stable at 3.3% 2) %GNPA down 30bps QoQ 3) slippages down to 1.5% and 4) credit cost down to 1.1% (from 2.5% in Q3). Current valuations (0.8x FY14E) seem to factor in most negatives. Upgrade to Buy.

- Asset quality matrices stabilising: Unlike its peers, there was no negative surprise on asset quality for UBI during the quarter, despite this being the first quarter after the change of the MD. In fact, matrices have shown signs of stability: %GNPA down 30bps QoQ, slippages down to 1.5% and credit cost down to 1.1% (from 2.5% in Q3). The only negative was the 37% QoQ jump in restructured assets (facility wise 4.1%, borrower wise 6.1%). Of the Rs32.4bn restructured loans added during the quarter, RS18bn was from SEBs. While incremental restructuring is still likely (SEB or otherwise), the quantum is likely to be much smaller.

- NIM stable at 3.3%: Reported NIM was largely stable at 3.26% as the 11bps QoQ increase in cost of funds was offset by 9bps QoQ expansion in yield on loans. With this, the FY12 NIM stood at 3.2% v/s 3.3% in FY11 though the management expects margins to remain under pressure in 1HFY13 and has guided ~3% for FY13.

- Operational profit growth strong: Core performance was in line with our expectations as a result of stable NIMs sequentially at 3.3%. Non-interest income (up 26% YoY) surprised positively led by core fee income (up 22% YoY) and robust recoveries. Operating performance received a further boost by 6% decline in opex due to lower provisions on retirement benefits.

- Deployment pace improves: Loan growth came in at 18% YoY and 16% QoQ primarily led by the corporate segment. Meanwhile, deposits grew much slower at 10% YoY (8.5% QoQ) resulting in smart improvement in deployment pace (81.2% vs 76.1% in 3QFY12). For FY2013, the management has guided for loan and deposit growth of 19% and 17% respectively.

- Provisions down sharply: Led by lower slippages, NPA provisions dropped by ~50% QoQ. Further, the bank also benefitted from MTM provision writeback of Rs1.1bn on its investment portfolio during the quarter. The bank incurred a small NPV loss of Rs790m on restructuring. Importantly, despite lower NPA provisions, coverage ratio (including write-offs) was largely steady at 62.2% vs 63.1% in Q3FY12.

- Upgrade to Buy: Conservatively, we maintain stiff credit cost assumptions (100bps for FY13 & FY14) given sustained challenging environment for asset quality. As we roll over our valuations to FY14E, we revise our target price upwards to Rs240 (upside of 17% from current levels). At the current market price, the stock trades at 5.2x FY2014E EPS and 0.8x FY2014E ABVPS. While we upgrade the stock to Buy, we believe that it will underperform its peers given the weaker capital position which should contain expansion in RoE.

Source : Equity Bulls

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