Nov 10, 2012 04:34 PM IST | Source:

Accumulate Union Bank of India; target Rs 256: KRChoksey

KRChoksey is bullish on Union Bank of India and has recommended accumulate rating on the stock with a target price of Rs 256 in its November 05, 2012 research report.

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KRChoksey is bullish on Union Bank of India and has recommended accumulate rating on the stock with a target price of Rs 256 in its November 05, 2012 research report.

"Union Bank of India reported steady net earnings of Rs 555 crore growing by 57.3% Y-o-Y & 8.4% q-o-q, in line expectation. NII grew modestly 11.4% y-o-y & 1.6% q-o-q aided by healthy loan book growth 20% y/y and stable spreads. Non interest income increased 9% y-o-y & 11.2%q-o-q supported healthy fee income growth (17.8% Y-o-Y) and higher trading gains (up 36.4% Q-o-Q). Core fee income continued to show healthy growth momentum, Up 17.1% Y-o-Y. Recoveries from written off accounts and forex income were down 3.4% & 22.9% sequentially.  Operating expenses increased 17.4% y-o-y mainly due to higher other operation expenses (up 21.3% Q-o-Q). Slippages ratio decreased sharply 204bps q-o-q to 1.9%, mainly attributable to closely monitoring of loan portfolio. The bank restructured loans amounting to Rs839 crore significantly lower than Q1FY13. Overall restructured assets stands now at 5.7% and cumulative slippages on it stand at 13.5%. The bank wrote back investment depreciation of Rs46 crore during the quarter. Advances and deposits growth stood at 20.0% Y-o-Y and 15.6% Y-o-Y respectively.

Stable NIMs and healthy loan book growth leading to 11.4% NII growth- Net interest income grew modestly 11.4% y-o-y and 1.6% q-o-q aided by loan book growth 20% y/y and stable NIMs. The management expects net interest margin to be stable at 3% in 2FY13 on the back of slower balance sheet growth and focus on profitability.  We are building in 18.5% loan growth leading to 16.4% CAGR in NII over FY12-FY14.

Healthy non-interest income– Core fee income grew 17.8% y-o-y and 19.0% q-o-q, healthy run rate among PSU banks. Forex income went down 22.9% q-o-q while cash recoveries saw decline 3.4% q-o-q, contributing 22% to non interest income. Trading gains reported at Rs75 crore vs. Rs55 crore in Q1FY13, up 56.7%   q-o-q, contributing 3.1% to operating income. We expect core fee income to grow modestly ~10.6% CAGR over FY12-14.

Slower business growth leading to balance sheet consolidation: Loan book increased 20.0% Y-o-Y & 1.6% Q-o-Q driven by retail advances (21.5% y/y & 5.1% q/q). Deposit grew 15.6% Y-o-Y & 1.8% Q-o-Q during the quarter. Saving bank deposits grew 11.5% Y-o-Y, lower than peer group aggregates. The management has guided 15% deposits growth and 17% loan book growth in FY13. Currently, the bank has 30% wholesale deposits

of total term deposits. Balance sheet slowdown and focus on maintaining asset quality & overall core profitability would be good short term business strategy in current business environment.

Asset quality held up well: The bank has reported Rs792 crore slippages in Q2FY13 vs. Rs1631crore in Q1FY13, significantly lower than quarterly run rate. Up gradation and recoveries were Rs863 crore, up 59.8% q-o-q basis. However, the bank has restructured advances amounting to Rs839 crore largely coming from textile, metal and pharma. Cumulative slippages from restructured assets stood at 13.5%. Given the economy slowdown and higher restructured assets pool, we believe asset quality trend continues to be key factor for stock performance. GNPA and Net NPAs stood 3.7% & 2.1% respectively with coverage ratio 61%.  We have factored in 2.5% and 1.8% slippages in FY13 and FY14 respectively.

Valuation & Recommendation: Union Bank reported steady operating performance during the quarter. Union bank has bucked asset quality trend in PSU banks; stock ended 8.1% higher than previous closing price. Balance consolidation, Steady NIMs, healthy fee income and stable asset quality are key highlights from the numbers. Slower business growth, containing increase in NPA and focus on core profitability would be seen as good business strategy by the market in our view. The stock is trading at 0.8x FY14 adjusted book and 4.2x FY14 earnings. We believe sustaining asset quality concerns continue to be key driver for stock’s performance in near term. We maintain ACCUMULATE rating on the stock with our target price to Rs 256," says KRChoksey research report.

Non-Institutions holding more than 90% in Indian cos

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