Union Bank of India - 1QFY2013 Result Update - Angel Broking

For 1QFY2013, Union Bank of India reported a weak set of numbers with net profit increasing by 10.1% yoy to Rs.512cr, in line with our estimates. We recommend a Buy rating on the stock due to its cheap valuations.

Slippages surprise negatively: The bank's balance sheet contracted on a sequential basis with advances de-growing by 2.2% qoq (up 19.5% yoy) and deposits declining by 0.3% qoq (up 11.5% yoy). The performance on the CASA front was subdued with current account deposits declining by 5.7% qoq (up 4.9% yoy) and saving account deposits remaining flat (up 11.3% yoy). The banks cost of funds remained stable sequentially, however the yield on funds were lower by 37bp on account of interest reversals (due to higher slippages witnessed in 1QFY2013). Consequently, the reported NIMS declined by 25bp to 3.0%. Fee income for 1QFY2013 was higher by 17.5% yoy, however weak performance on the treasury front (down 51.3% yoy) led to non-interest income remaining muted on a yoy basis. The bank witnessed ~Rs.1,600cr (3.7% annualised slippage rate) worth of slippages in 1QFY2013 of which Rs.900cr were from non-priority sector. The slippages from its non-priority sector were mostly on account of chunky NPAs (a pharma company, a hospitality company, an EPC contractor and smaller accounts from power and steel segment). The bank expects to recover ~Rs.400-500cr worth of these accounts by December end.

Outlook and valuation: The bank's asset quality has deteriorated considerably over the last one year which has led to significant correction in the stock price. The bank is currently trading at cheap valuations of 0.6x FY2014 ABV (nearly the lowest in the last 8 year), which is even lower than some of the mid-PSU banks having similar or lower fundamentals. We believe current valuations provide adequate margin of safety on the asset quality front and higher recoveries going forward could lead to upward re-rating of the stock. Hence, we recommend a Buy rating on the stock with a target price of Rs.245.

Source : Equity Bulls

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