Union Bank of India - Sustainability is the key - Centrum

UBI's Q2FY13 core as well as bottomline performance was in line with our expectations. Asset quality surprised positively with %GNPA improving by 10bps QoQ helped by lower slippage rate (1.8%) and healthy recoveries. Importantly, the sustainability of asset quality improvement is questionable on account of the chunky nature of recoveries and persistent risk of slippages over next few quarters. We rate UBI Neutral led by limited upside (3%).

Asset quality improves, but sustainability required: Unlike most peers, UBI reported an improvement in its asset quality matrix during the quarter with GNPA improving by 10bps QoQ to 3.7%. Dissecting further, the improvement in GNPA was led by lower slippages (1.8% vs 3.6% in previous quarter) as well as uptick in recoveries. It should be noted that the recoveries are chunky in nature and hence sustainability is questionable. Incremental restructuring was contained at Rs8.4bn with cumulative pool now at 8.3% (5.8% on net o/s basis). While the asset quality matrix improved during the quarter, sustainability of the trend going forward is crucial.

NIM stable on QoQ basis: Reported NIM was largely stable at 3.0% as the 18bps QoQ contraction in blended yields was offset by similar decrease in cost of funds. With this, the H1FY13 NIM stood at 3.0% - flattish compared with FY12 NIM.

Lower provisions helps bottomline: Led by lower slippages, NPA provisions dropped by ~20% QoQ. Further, the bank also benefitted from MTM provision write-back of Rs460mn on its investment portfolio during the quarter. Collectively, these benefits helped tide over higher provisions for restructuring. At the aggregate level, provisions were down 6% QoQ and 22% YoY to Rs4.9bn with credit costs contained at 80bps vs 100bps in the previous quarter.

Loan mix shifts away from corporate segment: Q2FY13 loan growth of 17% YoY matched the industry average compared with 19% avg growth in the last two quarters. From segmental perspective, the bank is clearly shifting away from corporate segment (down 4% QoQ) in favor of SME (9.2% QoQ) and Retail (5.1% QoQ). The bank has guided to grow in line with industry average for FY2013. Meanwhile, deposit growth was in line with industry at 16% YoY (2% QoQ) with CASA ratio remaining stable at 31% QoQ. Overall CAR is weak at 11.4% with tier-1 ratio at 8.2% and hence this remains a key risk to loan growth targeted by the bank though they are in active dialogue with the Government for capital infusion in the current year.

Neutral: Conservatively, we maintain stiff credit cost assumptions (110bps for FY13 & 100bps for FY14) given sustained challenging environment for asset quality. At the current market price, the stock trades at 6.2x FY2014E EPS and 1.1x FY2014E ABVPS. Given persistent challenges to improvement, we expect FY14E RoE (adjusted for revaluation reserve) to reach 16.4% and hence the fair valuation multiple of 1.1x FY14E. Given limited upside from current level (3%) we remain Neutral on the stock with a revised price target of Rs240.

Source : Equity Bulls

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