Accumulate Union Bank of India; target Rs 275: KRChoksey

KRChoksey is bullish on Union Bank of India and has recommended accumulate rating on the stock with a target price of Rs 275 in its February 01, 2013 research report.

"Union Bank reported consistent core operating performance with reported earnings of Rs 302 crore growing by 54% Y-o-Y & down 45% q-o-q. NII grew modestly 6.2% Y-o-Y & 2.2% Q-o-Q aided by healthy loan book growth 21% y/y and stable margins. Non interest income increased 8% Y-o-Y & 17.1% Q-o-Q driven by trading gains (up 49.3% Q-o-Q) and recoveries from written off accounts (up 94.6% Q-o-Q). Core fee income continued to be weak owing to lower syndication activity and cut processing fees in certain segments, up 6.5% Y-o-Y & down 2.0% Q-o-Q. Operating expenses rose 7.7% Y-o-Y & 4.4% Q-o-Q mainly due to additional employee related provisions. Provisions increased 76% Q-o-Q mainly on account of additional 75bps provisioning on std restructured assets and higher loan loss provision to improve coverage. Incremental slippages ratio continued down trending 39bps q-o-q to 1.5%, mainly attributable to increased monitoring and credit risk management. The bank restructured loans amounting to Rs1205 crore higher than Q2FY13 (Rs839 crs). Overall restructured assets stands now at 5.6% and cumulative slippages on it stand at 15.2%. The bank provided investment depreciation of Rs41 crore during the quarter. Advances and deposits growth stood at 21.6% Y-o-Y and 16.6% Y-o-Y respectively.

Stable NIMs and healthy loan book growth leading to 6.2% NII growth- Net interest income grew modestly 6.2% y-o-y and 2.2% q-o-q aided by loan book growth 21% y/y and stable NIMs. The management expects net interest margin to be stable at 3% in 4QFY13 from 2.95% in Q3FY13. We are building in 18.5% loan growth leading to 13.7% CAGR in NII over FY12-FY14.

Loan book and deposit growth outpace industry growth: Loan book increased 21.6% Y-o-Y & 7.5% Q-o-Q driven by retail advances (24.6% y/y & 6.1% q/q). Deposit grew 16.6% Y-o-Y & 5.9% Q-o-Q during the quarter. Saving bank deposits grew 12.3% Y-o-Y, in line with peer group aggregates. The management has guided 15% deposits growth and 17% loan book growth in FY13. Currently, the bank has 10.4% bulk deposits of total deposits. We believe Retail led balance sheet growth and focus on improving asset quality would improve operating metrics in medium term.

Asset quality - continuous improvement: The bank has reported Rs677 crore slippages in Q3FY13 vs. Rs792crore in Q2FY13 and Rs1631 crs in Q1FY13, significantly lower than quarterly run rate. Up gradation and recoveries were Rs310 crore, went up 91.9% q-o-q basis. However, the bank has restructured advances amounting to Rs1205 crore largely coming from iron and steel. Cumulative slippages from restructured assets stood at 13.5%. GNPA and Net NPAs stood 3.4% & 1.7% respectively with coverage ratio 66%. We have factored in 2.5% and 1.8% slippages in FY13 and FY14 respectively. Given the economy slowdown and higher restructured assets pool, we believe asset quality trend continues to be key factor for stock performance.

Valuation & Recommendation: Union Bank reported steady core operating performance during the quarter. Union bank has continued to show improvement in asset quality, relatively outperforming PSU banks; stock ended 4.1% higher previous closing price. We have revised downward FY13 & FY14 earnings estimate by 15% and 1.7% factoring higher provisions for improving provision coverage ratio (neutral impact on adjusted book). Slower business growth, containing increase in NPA and focus on core profitability would be seen better business strategy by the market in our view. The stock is trading at 0.9x FY14 adjusted book and 4.2x FY14 earnings. We maintain ACCUMULATE rating on the stock with our target price to 275," says KRChoksey research report.

Non-Institutions holding more than 90% in Indian cos

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