Union Bank of India - 2QFY2013 Result Update - Angel Broking

During 2QFY2013, UNBK reported a moderate operating profit growth of 5.6% yoy, which was in-line with our estimates. However, the bottom-line grew by a strong 57.3% yoy, which was due to 21.8% yoy decline in provisioning expenses (on account of lower slippages/restructuring and higher recoveries/upgrades).

NIMs stable sequentially; NPA levels decline on lower slippages and higher recoveries/upgrades: During 2QFY2013, the bank's advance book contracted sequentially by 0.6%, while growth in deposits was subdued at 1.8% qoq. Reduction in lending rates and waiver of processing charges across various home and car loans products, aided its retail loan book to grow at a relatively higher pace of 3.8% qoq. CASA deposits remained flat sequentially. Consequently, the reported CASA ratio declined by 45bp qoq to 30.5%. Reported NIM remained stable qoq at 3.02%, as a 16bp sequential fall in cost of funds was offset by a similar decline in yield on funds. The non-interest income (excl. treasury) grew by 17.5% yoy, largely aided by a robust performance on the fee income front. During 2QFY2013, slippages came in at Rs.792cr (annualized slippage rate of 1.8%) compared to Rs.1,631cr in 1QFY2013 (annualized slippage rate of 3.7%). Incremental slippages were largely granular in nature except for 2 accounts worth Rs.100cr or more. Going forward, the management expects to maintain the quarterly slippage run-rate at levels witnessed in 2QFY2013. Recoveries/upgrades came in higher at Rs.627cr (lumpy to the extent of contribution of ~Rs.200cr from four accounts), compared to Rs.461cr in 1QFY2013. On an absolute basis, gross and net NPA levels declined sequentially by 1.1% and 5.0%, respectively. The bank restructured advances worth Rs.849cr during 2QFY2013 (compared to Rs.1,641 in 1QFY2013). The management expects additional provisioning of Rs.70cr, on account of RBI's 75bp increase in provisioning requirement for standard restructured advances. The management has guided for fresh restructuring of around Rs.3,000cr in the next two quarters.

Outlook and valuation: We remain watchful of the bank's performance on the asset quality front, particularly incremental slippages/restructuring and recoveries/upgrades going ahead. The stock has surged significantly (more than 10%) in the last few days and currently trades at valuations of 0.8x FY2014 ABV. We recommend an Accumulate rating on the stock with a target price of Rs.235.

Source : Equity Bulls

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