Sell Union Bank; target of Rs 200: KRChoksey

“Union Bank posted another dismal performance with PAT of Rs 197 crore which is down 63.5% Y-o-Y & 44.4% q-o-q, below our expectation. NII grew modestly 10.2% y-o-y & 7.2% q-o-q aided by 10bps NIM expansion sequentially and 6.1% q-o-q growth in loan book. Non interest income grew strongly 35.2% y-o-y & 18.2% q-o-q driven by forex income (up 27.9% q-o-q) and cash recoveries (up 114.3% q-o-q). Trading gains was at Rs101 crore vs. Rs100 crore in Q2FY12, flat q-o-q. Operating expenses increased 9.7% largely attributable to additional pension provisions (10% of OPEX). Slippages ratio declined from 5.2% in Q2FY to 1.5%, considerable improvement; however the bank has witnessed large restructuring amounting to Rs2,042 on which the bank has provided Rs375 as PV loss during the quarter. The bank also reported Rs73 crore MTM losses on fixed income and equity portfolio. The management has pared down growth guidance and sounded cautious on asset quality front. Advances and deposits growth were subdued at 16.8% y-o-y and 10% y-oy, below than the industry average.”

“Net interest income grew modestly 10.2% y-o-y and 7.2% q-o-q aided by 10bps sequential NIM improvement and 6.1% q-o-q growth in loan book. NIM expansion was primarily attributable to 77bps increase in CD ratio, steady growth in CASA. Cost of funds shot up by 18bps q-o-q against ~24bps increase in the blended loan yield, resulted into 10bps NIM improvement sequentially. We are building in 17% loan growth and 17bps NIM contraction in FY12. We expect NII to grow 14.5% CAGR over FY11-FY13e. The bank has reported Rs566 crore slippages in Q3FY12 vs. Rs1,821 crore in Q2FY12 largely due to one off increase on account compellation of system based NPA recognition. Up gradation and recoveries were Rs827 crore & Rs740 crore respectively, significant improvement q-o-q basis. However, the bank has restructured advances amounting to Rs2042 crore due to major account in telecom sector, taking total restructured book to 5.5% of advances, one of the highest in the industry. Cumulative slippages from restructured assets stood at 12.5%. Given the economy slowdown and higher restructured assets size, we believe asset quality continues to be under pressure next two quarters. GNPA stood at 3.49% which the management expects to bring down to 3.0% (earlier guidance was 2.65% in Q2FY12) by the end of this fiscal as recoveries pick in Q4FY12. We have factored in 2.5% and 2.0% slippages in FY12 and FY13 respectively.”

“Union Bank reported another disappointing performance during the quarter. Higher provisions, sharp fall in net profits and rise in restructured assets are key disappointment from the numbers. Continuous revision with guidance in respect of growth and asset quality make us uncomfortable for earning’s visibility in medium term. Accordingly, we have revised downward our estimates by 26.2% & 0.9% in Fy12 and FY13 respectively to factor in lower growth and higher credit costs. The stock is trading at 0.9x FY13 book and 4.7x FY13 earnings. We believe below industry growth outlook and asset quality concerns continue to persist which will act as key headwinds for stock’s performance in near term. We maintain our SELL rating on the stock with our target price to 200. We believe investors can look at this stock below Rs180 as a value BUY opportunity,” says KRChoksey research report.