Union Bank of India (Q1 FY14)

India Infoline News Service | Mumbai |

Asset quality deteriorated significantly with GNPA ratio rising from 2.98% in Q4 FY13 to 3.5% in Q1 FY14. Delinquency ratio shot up from 1.8% to 2.9% sequentially.

CMP Rs126, Target Rs128, Upside 1.0%
  • Union Bank of India’s (UBI) credit portfolio de-grew by 2.6% qoq, almost in-line with our expectation. As expected, Corporate portfolio (55% of the total portfolio) de-grew substantially by 7.6% qoq. This can be attributed to weak project loan demand resulting from slow down in industrial activity. Retail segment posted a healthy grow of 4.3% qoq/21.7% yoy. On the other hand, deposits reported a robust growth of 3% qoq/22.3% yoy. The momentum in deposit growth was solely driven by Retail TDs. High-cost Deposits’ (Bulk+CDs) share has been reduced further from 8.8% of total deposits in Q4 FY13 to 8% in Q1 FY14. CASA deposits de-grew by 3.1% sequentially, resulting in multi-quarter low CASA ratio of 29.1% as on Jun’2013. We do not foresee any material improvement in CASA ratio in the near term owing to high differential TD rates.


  • NIM declined steeply by 26bps qoq to 2.63% in Q1 FY14 mainly due to fall in Yield on Funds (19bps qoq), rise in Cost of Funds (4bps qoq) and decrease in Credit/Deposit ratio by 430bps qoq. The decline in Yield on Funds was on account of full impact of reduction in the base rate in Feb’2013 and interest reversal pertaining to fresh slippages and restructured loans. Going forward, we expect NIM to remain under pressure on the back of weak credit growth, deteriorating asset quality and declining CASA ratio.


  • Asset quality deteriorated significantly with GNPA ratio rising from 2.98% in Q4 FY13 to 3.5% in Q1 FY14. Delinquency ratio shot up from 1.8% to 2.9% sequentially. Of the total slippages of Rs14.7bn, ~Rs6bn pertained to two large corporate accounts from Gems & Jewellery and IT sector. Less than commensurate provisioning resulted in 35bps jump in Net NPA ratio to 1.96% in Q1 FY14. Outstanding restructured advances rose from 5.6% of total deposits in Q4 FY13 to 6.5% in Q1 FY14. During the quarter, advances worth Rs10.7bn were added to the restructured book as against management’s expectation of Rs22bn. Few SEBs that were not restructured as expected in Q1 FY14 are likely to come in Q2 FY14. Management expects restructuring of Rs50bn in Q2 FY14; of which Rs23bn pertains to Rajasthan and UP SEB as per the special dispensation plan of the GoI. PCR declined marginally from 63.4% to 65.2% qoq. Provisions are likely to remain elevated in the wake of higher slippages, huge build up in restructuring pipeline and increase in provisioning requirement for standard restructured advances in phases as per the Mahapatra Committee’s recommendation.


  • Non-interest income recorded significant growth of 54% yoy driven by treasury income of Rs3.6bn compared to Rs1.4bn in the corresponding quarter of the previous year. Weak NII growth and higher opex growth resulted in sharp jump in Cost/Income ratio, from 41% in Q4 FY13 to 47% in Q1 FY14. We expect this trajectory to continue on account of weakness in margin and lower trading gains in the ensuing quarters.


  • Weak revenue growth and sharp deterioration in asset quality has raised concerns over UBI’s performance in the coming quarters. Given the current challenging environment, we have raised our NPA assumptions resulting in ~25% slash in FY15E Adj.BV. In addition to this, weak credit growth, margin pressure and elevated credit cost would continue to act as overhang on FY14-15E earnings growth. Downgrade stock to Market Performer with 9-month target price of Rs128.

Result table
(Rs mn)
Q1 FY14
Q4 FY13
% qoq
Q1 FY13
% yoy
Total Interest Income
68,573
66,251
3.5
60,699
13.0
Interest expended
(49,482)
(46,456)
6.5
(42,482)
16.5
Net Interest Income
19,091
19,795
(3.6)
18,217
4.8
Other income
7,563
8,755
(13.6)
4,912
54.0
Total Income
26,654
28,550
(6.6)
23,129
15.2
Operating expenses
(12,536)
(11,703)
7.1
(10,459)
19.9
Provisions
(6,816)
(6,555)
4.0
(5,185)
31.5
PBT
7,302
10,291
(29.0)
7,486
(2.5)
Tax
(1,700)
(2,397)
(29.1)
(2,370)
(28.3)
Reported PAT
5,602
7,894
(29.0)
5,116
9.5
 
Key  Ratios
Q1 FY14
Q4 FY13
chg qoq
Q1 FY13
chg yoy
NIM (%)
2.6
2.9
(0.3)
3.0
(0.4)
Yield on Funds (%)
8.9
9.1
(0.2)
9.3
(0.5)
Cost of Funds (%)
6.4
6.4
0.0
6.5
(0.1)
CASA (%)
BSE 148.25 1.60 (1.09%)
NSE 148.20 1.65 (1.13%)

***Note: This is a NSE Chart

 

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