Union Bank of India - Sustainability is the key, positives priced in - Centrum

UBI's Q3FY13 core performance came in line though bottomline performance was significantly below as the bank hiked provisions to improve its PCR even as asset quality improved QoQ. Asset quality surprised positively with %GNPA improving by 30bps QoQ helped by lower slippage rate (1.7%vs 2.2% in Q2FY13). Importantly, while asset quality matrix has been stable in last two quarter, sustainability important given the operating environment. We rate UBI Neutral led by limited upside (8%).

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 30bps QoQ to 3.4%. Dissecting further, the improvement in GNPA was led by lower slippages (1.6% vs 1.8% in previous quarter) as well as continued strength in recoveries. Restructured assets increased by 8% QoQ to 8.5% of loans though on net outstanding basis it was at 5.8%. While the asset quality matrix has shown improvement in last two quarters, sustainability of the trend going forward is crucial.

NIM contracts marginally on QoQ basis: Reported NIM of 2.95% indicated a marginal contraction on a sequential basis as 10bps QoQ expansion in blended yields was offset by ~20bps increase in cost of funds. With this, the H1FY13 NIM stood at 3.0% - flattish compared with FY12 NIM.

Higher provisions suppress bottomline: Despite improvement in asset quality provisions were up 76% QoQ implying a provisioning cost of 1.9%. The sequential spike in provisioning was largely due to NPA provisions and provisions on restructuring. Given the dynamics, the provisioning coverage ratio improved by 540bps to 50.4%. The prudence displayed by the management in shoring up PCR over reporting healthy bottomline is a welcome step.

Loan growth picks up: In the light of stability seen on asset quality during last two quarters, UBI accelerated its loan growth to 21.6% from 17% YoY in the previous quarter. From a segmental perspective, the corporate segment led the growth followed by agri and retail. Meanwhile, deposit growth stood at16.6% YoY (6% QoQ) with CASA ratio expanding by 75bps QoQ to 31.3%. The bank is actively shedding bulk deposits. Overall CAR is weak at 10.8% with tier-1 ratio at 7.4% though the Government has promised capital infusion during the current fiscal which should help shore up capital adequacy.

Upgrade to 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 6.5x FY2014E EPS and 1.1x FY2014E ABVPS. We have tweaked our earnings estimates as we factored in additional information which leads us to revise our fair value estimate to Rs260. Given the correction post earnings release and upwards revision in fair value, we upgrade the stock to Neutral from Reduce.

Source : Equity Bulls

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