Union Bank of India - Q4FY13 Result Update - Sushil Finance

Union Bank of India (UBI) has reported decent numbers and ahead of expectations. NII growth remained soft while non-interest income growth was high on sharp trading gains; stabilization seen in asset quality, while lower tax & comparatively lower credit cost helped growth in PAT during Q4FY13.

Key Highlights of Q4FY13

- During Q4FY13, NII grew by 5% YoY to Rs.19.8 bn, on the back of decent Advances growth. Its Advances grew 15% YoY, mainly on back of sharp growth of 46% YoY in MSME segment and 23% YoY growth in agriculture. Its Deposits grew by 18% YoY, while CASA grew by 17% YoY as current account showed sharp growth of 25% YoY and growth in saving deposits was 14% YoY. Its CASA share stood at 31.0%, stable YoY & QoQ . The Bank has shed its high cost bulk deposit to bring its proportion down to 8.8% of total deposits (Sequentially shows increase by 50 bps).

- The Bank reported a decent non-interest income growth of 16% YoY mainly driven by sharp trading gains while fee income growth continued to be sluggish.

- The Bank's operating expense increased by 13% YoY with employee expense increasing by 12% YoY but was down 9% QoQ as it wrote-back some expenses provisions. Other operating expenses increased by 15% YoY as the Bank continued to expand its branch and ATM network in Q4FY13.

- UBI's total provisions in Q4FY13 increased by 27% YoY, whereas it decreased by 24% QoQ to Rs.6.55 bn with loan losses & standard assets provisions at Rs.3.13 bn against Rs.3.65 bn in Q4FY12. Investment provisions increased 43% YoY as some restructured debt portions converted to equity required Mark-to-Market provisions. As a result, Net profit grew by 2% YoY (partly helped by lower tax expenses) and 161% QoQ to Rs.7.89 bn.

Downward pressure on NIMs continue, likely to continue for few more quarters

- In Q4FY13, NIMs stood at 2.89%, contracting 37bps YoY & 6bps QoQ, mainly due to decrease in yields on advances (Bank had cut base rate in Q4) and cost of funds did not decline materially (came down only on shedded high cost deposits). Going ahead, the Bank issued concern of pressure on NIMs but will target to keep NIMs in 2.9%-3% range as it expects cost of funds to ease further mainly on repriced bulk deposits to benefit in coming quarters. We have kept our NIM estimate at 2.83% in FY14E, down 13 bps from 2.96% in FY13 as further base rate cuts would put pressure on Yields immediately, while cost of funds will remain sticky for some time before easing going ahead.

Asset quality improves as fresh slippages stabilize, recoveries continue

- During the quarter, the Bank's incremental delinquencies was at Rs.8.75 bn (1.7% annualised v/s 1.4% in Q3FY13) mainly contributed by few accounts of Rs.500-Rs.1000 mn but otherwise spread. The Bank added Rs.14 bn to restructured portfolio and it hinted a pipeline of Rs.22 bn quarters ahead with major being from Iron & Steel, Construction and Textiles sectors. The cumulative restructured loan portfolio now stands at Rs.169.6 bn or 8.2% of advances (outstanding at Rs.116.3 bn or 5.6% of advances). The Bank holds their strategy to arrest fresh slippages and speed up recoveries in smaller accounts and also focus to recover large accounts in the subsequent quarters. Although asset quality has improved, we expect some bad loans may crop up in Q1FY14 (trend also suggests) but recoveries and upgradations will keep asset quality stable.

- In absolute terms, Gross NPAs increased by 16% YoY but decreased 1% QoQ and Net NPAs increased by 11% YoY and 6% QoQ. In percentage terms, Gross NPAs stood at 3.0%, down 3bps on YoY & 38bps on QoQ basis. Net NPAs stood at 1.6%, down 9bps YoY & QoQ respectively in Q3FY13.

OUTLOOK & VALUATION

Union Bank's core performance continues to remain steady on back of decent biz growth and maintained NIMs (though now in pressure). The Bank has surprised positively on asset quality and has been able to manage it quite well. Considering decent Q4FY13 results, we have slightly tweaked our estimates by slightly reducing business growth and NIMs for FY14E, while also introduced our FY15E. Going forward, we expect its Advance & Deposit to grow by 16.7% & 17.1% respectively in FY14E and 18.2% & 17.3% respectively in FY15E, while Net Profit to grow at 17% in FY14E & at 13% in FY15E. Focus on improving the asset quality, cautious view on lending to risky sectors, decent CASA profile emerge as key value drivers for the stock. UBI currently trades at an valuation of 0.9x FY15E ABV & 5.0x FY15E Earnings. We maintain "BUY" with a price target of Rs.296.

Source : Equity Bulls

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