Reduce Union Bank; target of Rs 210: Emkay

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Reduce Union Bank; target of Rs 210: Emkay

Emkay Global Financial Services is bearish on Union Bank of India and has recommended reduce rating on the stock with a target of Rs 210 in its January 25, 2012 research report.

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Emkay Global Financial Services is bearish on Union Bank of India and has recommended reduce rating on the stock with a target of Rs 210 in its January 25, 2012 research report.

"Union Bank Q3FY12 NII at Rs17.8bn (up 10% yoy and 7% qoq) was significantly ahead of our / street estimates. The NII growth was aided by 17% yoy (8% qoq) growth in loan portfolio and 10bps qoq improvement in NIM to 3.31%. It also included Rs590mn of interest on IT refund, adjusted for which the growth in NII would be 3.5% qoq with NIMs remaining flat. However, despite steady 20% yoy growth in non-interest income, net profit at Rs1.9bn was down 44% qoq (66% yoy) due to substantially higher NPA + other provisioning. Against 12% yoy (5% qoq) growth in balance sheet, growth in loan portfolio continues to remain pretty satisfactory at 17% yoy (8% qoq). Deposit growth came in at 10% yoy and 5% qoq."

"As at Q3FY12, Union Bank loan portfolio expanded 17% yoy (8% qoq and 3% YTD). This growth is materially higher than a 4% YTD decline as at Q2FY12. Given uncertain credit environment, we expect overall non-food credit growth rate to ease. The mgmt was now guided for a loan growth in range of 16%-18%. We have factored in 16% CAGR in loan portfolio over FY11-13E. An 8% sequentially growth in loan portfolio during Q3FY12 + lending rate hike in mid-Q2, compensated against cost of funds. Q3 NIM at 3.3% actually expanded 10bps qoq. In a recent move, the bank has taken a first step towards downward revision in its base rate. We believe NIM to ease to 3% levels as Q4 would include large PSL loans with relatively lower pricing of yields as compared to previous quarters."

"While accretion in slippages has eased from the recent peak, we believe it is too earlier to accept moderation in NPA. Q3FY12 results exhibited strong operating performance, however, loan growth moderation with relatively higher problem loans at 9% (GNPA + restructured loans) remain a concern. We would expect that despite the slippages materially trending down in FY13E to 1.5%, the credit costs may not move down due to material run down on PCR in FY11 as well as FY12. Also recoveries and up-gradations as % of opening GNPLs haven't improved significantly (30% in M9FY12 vs 34% in M9FY11, up just 10% in absolute term). And hence, we still expect that despite material improvement in ROAs in FY13E, the earnings CAGR over FY11-13E may remain moderate at 13%. Hence, despite attractive valuations at 1.1x / 0.9x FY12/FY13 ABV we continue to remain negative on the stock. Maintain REDUCE with target price of Rs210. Prefer Allahabad Bank over Union Bank given healthy return ratios, steady balance sheet growth and minimal concerns on asset quality including restructuring book," says Emkay Global Financial Services research report.

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