Buy United Bank of India; target of Rs 75: Emkay

Emkay Global Financial Services is bullish on United Bank of India and has recommended buy rating on the stock with a target of Rs 75 in its August 7, 2012 research report.

“United Bank’s NII at Rs6.8bn (+20% yoy) and net profit at Rs1.74bn (+31% yoy) were inline with est. and were aided by higher non-int income and lower than expected provisions. Adjusting for interest reversals, growth in NII would have remained higher. Key positives from the quarter were: a) 5bps sequential rise in NIM to 3.05%, b) CASA ratio at 40%+ for past 8-quarters c) relatively stable asset quality with GNPA / NNPA up mere 2% / 3% each d) Slippages at Rs3bn (1.9% annualized) vs Rs5.9bn in Q4FY12 and Rs3.9bn in Q1FY12 e) incremental NPA provisioning at 77%. Restructured portfolio stands at Rs41bn (6.5%) with slippages in the portfolio running high at 43% of FY11 book. Lower core tier-I ratio at 7.3% (networth ex perpetual debt instruments) will warrant capital infusion even as we have taken the same in our numbers.”

“Loan portfolio grew 19.4% yoy. Growth in deposits stood at 16% yoy with growth in CASA deposits tad higher at 17% yoy. CASA ratio has remained in excess of 40%+ for past 8-quarters. LDR has remained largely stable at 68-71% for past several quarters. Recovery / up-gradation for Q1FY13 stood at Rs1.3bn (25% of opening NPA). Increasing reliance on recoveries / up-gradation will only lower provisioning requirement in coming quarters. We are factoring 2% / 1.1% of slippages / credit cost over FY13-14E.”

“United Bank Q1FY13 results reiterate our positive stance on the bank. Operating parameters viz NIMs, CASA, declining share of bulk deposits and controlled slippages have improved over the past several quarters. However, higher NNPA / networth at 22% and lower core-tier I CAR at 7.3% remains key overhang on the stock. Problem loans account for 8.3% (NNPA + restructured portfolio) of loans. To bring it to 9%, the bank will have to do a dilution of ~30% in equity to raise Rs10bn or so over next 2-3 years. One of the ways could be to convert the preference share capital of Rs8bn into equity as under Basel III, it won’t be available to be counted as quasi tier I capital."

"We have already taken the dilution in our numbers with 18% dilution in equity at Rs60/share amounting to Rs4bn of infusion. Since, the stock trades at less than its BV, the incremental dilutions are going to be diminutive for the existing BV. Valuations at 0.7 xs FY13 ABV with dividend yield at 5% provides comfort. Retain buy with target price of Rs75,” says Emkay Global Financial Services research report.

FIIs holding more than 30% in Indian cos

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