Stock Market Update on Union Bank of India for 1QFY2012 with a Buy recommendation and a Target Price of `357 (12 months)
For 1QFY2012, Union Bank of India posted a moderate set of numbers, which were, however, below our as well as street’s estimates primarily due to the higher provisioning (additional `214cr as stated by the bank) done by the bank to meet the RBI’s changed guidelines for provisioning norms. Consequently, net profit took a hit and declined by 22.8% yoy and 22.3% qoq to `464cr. We recommend Buy on the stock.
Contraction in business, NIM also declines sequentially: The bank’s advances and deposits witnessed a decline during 1QFY2012, with deposits falling by 1.6% qoq (up 16.1% yoy) and advances declining by 3.6%. CASA deposits also declined by 2.4% qoq (up 12.4% yoy), leading to a 26bp qoq and 106bp yoy decline in CASA ratio to 31.5%. The bank’s yield on advances increased by 28bp qoq to 9.1%; however, the cost of funds increased by relatively higher 62bp to 6.2%, leading to a 34bp sequential decline in reported NIM to 3.1%. Fee income growth was moderate during 1QFY2012, registering growth of 11.3% yoy compared to yoy loan growth of 16.7%. Operating expenses increased by 22.9% yoy (down 37.2% sequentially) to `908cr. For 1QFY2012, the bank made a provision of `101cr towards pension for serving employees and gratuity liabilities.
Outlook and valuation: In our view, Union Bank of India is structurally among the more profitable and competitive PSU banks. We have a positive outlook on the bank due to its robust traction in CASA deposits and relatively fast-expanding branch network over the past few years. The stock is trading at 1.1x FY2013E P/ABV, which is below its five-year median of 1.3x. Also, relative to most PSU banks, the bank has been ahead of the curve in implementing system-based NPA recognition, leading to a large part of the negative surprises already being factored in (although one more quarter of pain cannot be ruled out due to switchover to system-based NPA recognition for agri accounts as well). Hence, we recommend Buy on the stock with a target price of `357, based on median level of 1.3x and implying an upside of 15.4% from current levels.
