The Union Bank of India stock has done better than the BSE Bankex this year, although bad loans rose in the third quarter. The March quarter results now show that loan growth has accelerated and so has growth in net profit, which at Rs594 crore was up 27.5%. But the bad loans problem has worsened.
Gross non-performing assets, or NPAs, at the end of March were 27% higher than at the end of December, increasing to 2.2% from 1.9% of loans in December. Net NPAs rose from 0.23% of loans in September to 0.81%. Moreover, Union Bank’s bad loans coverage ratio, too, has deteriorated, from 88.38% at the end of September to 80% in December and to 74% in March. While 8% of the Rs7,000 crore or so worth of restructured assets have become bad loans, the bank expects around 15% of the restructured assets to turn bad. That signals still more pain on the asset quality front.
That concern overshadows the good results and the improvement in the proportion of low-cost current and savings bank deposits. Net interest margin expanded a huge 0.62 percentage point sequentially from the December quarter to 3.39%, thanks to deposit repricing. Together with strong loan growth, it led to net interest income going up by a massive 50.76% year-on-year. But the worsening asset quality is likely to hobble the stock in future.
Unlike the Union Bank scrip, which fell after the results were declared on Thursday, the Punjab National Bank (PNB) stock moved up a bit.
Graphic: Yogesh Kumar / Mint
PNB’s asset quality, too, has suffered, but much of the deterioration had already occurred in the December quarter. At the end of March, gross NPAs were 1.71% of loans, lower than the 1.83% at the end of December. The management says that excluding agricultural advances eligible for debt relief, net NPAs are 0.35%. But then the bank had earlier said that excluding the impact of debt relief, net NPAs at the end of December were 0.3%. Nevertheless, the slippage in the March quarter has been marginal. The provision coverage ratio slipped a bit from 82.91% at end-December to 81.17% at end-March.
Advances growth has been strong, net interest margin improved by 0.15 percentage point to a high 3.99% and the proportion of low cost deposits has improved. Profit before tax, after adjusting for exceptional items, is up 23%.
The PNB stock trades at about 1.6 times fiscal 2011 earnings, compared with Union Bank’s 1.4 times. That premium for PNB should remain.