Buy Union Bank of India - Motilal Oswal

Union Bank of India (UNBK IN; Mkt Cap USD3.5b, CMP Rs323, Buy)

Union Bank of India 1QFY11 NII grew 65% YoY (against our estimate of 59% YoY growth) and PAT grew 36% YoY (against our estimate of 18%).

Key highlights

- Loans grew 30% YoY and 4% QoQ and deposits were up 19% YoY. CD ratio expanded by 260bp QoQ to 72.9%.

- Strong growth in NII was led by NIM expansion of 71bp YoY (a drop 15bp QoQ adjusted) and 30% YoY growth in loans.

- CASA growth was strong at 28% YoY within which SA deposits grew 35% YoY.

- Fee income growth moderated to 10% YoY v/s 30%+ growth in FY09 and FY10.

- While slippages were higher at Rs6.2b (~2.1% annualized slippage ratio), upgrades (Rs3b) and write-offs (Rs2.6b) made up for them. GNPA grew 2% sequentially.

- Employee expenses increased 45% YoY but were sequentially stable. The bank will provide Rs2.4b for pension liability (total liability of Rs12b) this year, of which Rs600m was provided in 1QFY11. The bank has made some provision for gratuity (amount not disclosed).

Valuations and view: We expect strong core operating income growth of 45% YoY led by robust loan growth of 22% in FY11, sharp improvement in blended margins and 20%+ core fee income growth. In our view, strong core operating performance will make up for higher NPA provisions and thus, PAT growth is likely to be 20%. Overall, we have upgraded our earnings estimates for FY11 by 5% and for FY12 by 3% to account for higher margins. Return ratios are likely to be strong with RoA of ~1.2% and RoE of 25%+ over FY11-12. The stock trades at 1.2x FY12E BV and 5.3x FY12E EPS. Maintain Buy.

Source : Equity Bulls

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