Union Bank of India - Asset quality stress continues - Phillip Capital India

Union Bank's Q2FY14 continued to disappoint on the back of increasing asset quality stress. PAT of Rs 2.1 bn (-62.5% YoY) was below estimates due to decline in operating profits coupled with higher provisions on increasing NPAs and higher restructuring done in Q2FY14. While the credit cost declined QoQ, higher provisions in Q2FY14 (Rs 9.4 bn, + 92% YoY) were led by higher standard asset and FITL/NPV provisions due to higher restructuring. Slippages for Q2FY14 stood at Rs 16.6 bn which were driven by few large corporate accounts and fresh restructuring was Rs 15.3 bn. Stressed asset book (outstanding standard restructured + NNPA) forms 6.9% of the book.

Key highlights during the quarter

- Despite strong advances growth, NII growth was muted at 5.6% YoY due to NIM compression. NIM declined by 9 bps QoQ to 2.54% driven by 9 bps QoQ increase in cost of funds. Yields were flat QoQ as the bank revised its base rate in Sep only, the impact of which will flow in the ensuing quarters.

- Advances grew by 25.7% YoY and 7.2% QoQ driven by strong growth in retail (+28.5%), MSME (+41.4% YoY), agri (+27.1% YoY) and drawdown by PSU firms. Deposits grew by 27% YoY, driven by strong growth in term deposits. CASA deposits increased by 18% YoY taking the CASA to 28.2% (29.1% in Q1).

- Non-interest income grew by 12% YoY to Rs 6.1 bn due to moderation in fee income growth. Opex growth remained high at 19.3% YoY as the bank continued to make employee provisions (Rs 0.5 bn) in anticipation of wage hike. Cost/Income increased to 52.3% (47% in Q1FY14).

- Loan loss provisions remained elevated at Rs 4.6 bn due to higher slippages and NPA ageing. PCR declined by 300 bps QoQ to 60.43%.

- Asset quality deterioration continued with fresh slippages of Rs 16.6 bn driven by few lumpy accounts (Rs 9 bn) from power, iron and steel, manufacturing and services sector. GNPAs increased by 14 bps QoQ to 3.64%, while NNPAs increased by 19 bps QoQ to 2.15%. The bank expects Rs 5 bn of slippages to be upgraded in the ensuing quarters as they have been referred for restructuring. In Q2FY14, the bank restructured loans worth Rs 15.3 bn driven by power, iron & steel and textile. The bank also indicated Rs 38-40 bn of loans will be restructured going forward of which Rs 22 bn will be fresh disbursals to UP and Rajasthan SEB (net of bond issuance).

Outlook and Valuation

Union Bank's NII growth has witnessed moderation in the last 8-9 quarters largely driven by NIM compression. NIMs have declined from an average of 3% (FY12 and H1FY13) to 2.54% currently. We expect NIMs to improve going forward due to full impact of base rate hike in Sep'13 and some moderation in cost of funds post reversal of RBI's 15th July measures. However, we expect asset quality to remain under pressure until there is meaningful pick up in the economy. Thus credit costs are expected to remain elevated. The bank has guided for restructuring pipeline of Rs 38-40 bn. Higher loan loss + restructuring provisions coupled with weak non-interest income growth and wage provisions will exert pressure on earnings growth over FY14-15E. The bank is looking to raise capital over and above the governments budgeted allocation of Rs 5 bn to meet growth targets, which is imperative since post government's capital infusion, Tier I CAR will still be at 8% or less. At the CMP, the stock trades at 0.5x FY15E Adj BV. We maintain Buy with a revised PT of Rs 165.

Source : Equity Bulls

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