Buy Union Bank of India; target Rs 209: Dolat Capital

"Union Bank of India’s (UBI) net interest income (NII) grew 9% YoY to Rs 18.8bn - 2.6% lesser than our estimates of Rs 19.3bn (in Q4 FY12). Marginal increase in cost of funds on the back of moderate business growth, higher incremental C-D ratio and higher yield on funds curtailed higher erosion in margin. The bank’s margin declined only by 5bps to 3.26% compared to 3.31% in Q3 FY12. The non-fund income grew by 25.8% YoY to Rs 7.6bn, primarily due to robust recoveries of written-off accounts (Rs 1.6bn as against Rs 1bn in Q4 FY11) thereby aiding operating profit. Further, the total operating expenses decreased by 29% YoY to Rs 10.3bn mainly due to 43% YoY decrease in employee expenses. Hence, this resulted in higher than expected operating profit of Rs 16bn compared to our estimates of Rs 14bn."

"The bank made much lesser than expected provisions (excluding tax provisions) reflecting into 29.4% YoY growth in net profit to Rs 7.7bn (compared to our estimates of Rs 7.3bn) and consensus estimates of Rs 5.5bn. The bank’s asset quality ratios improved on sequential basis, with net NPA ratio sequentially fall by 18bps to 1.7% while gross NPAs ratio by 32bps to 3.01%. On sequential basis, gross slippage ratio came down to 1.45% from 1.56% in Q3 FY12; a positive surprise. During the quarter, around Rs 32.4bn loans were restructured; out of which around Rs 18-20bn belongs to one SEB account. Going forward, the management expects that its gross NPAs would decline on account of lesser slippages and higher recoveries."

"Overall, quantitatively and qualitatively, the bank’s Q4FY12 performance was better than our expectations on operating and net profit levels. Though, margin contraction, restructuring pipeline and moderate business growth would contain return ratio expansion. We reduce our earnings estimates by 7% for FY13 and increase by 5.5% for FY14 and rollover our target price on FY14’s estimates. We revise our rating on the stock to Reduce from Sell with a revised price target of Rs 209. At current price, it quotes at 1.0x and 0.9x ABV FY13 and FY14 respectively; based on our target price, the stock would quote at 0.9x adjusted book value FY14," says Dolat Capital research report.

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