For 4QFY2009, Union Bank of India (UBI) registered robust balance sheet growth of 6-7% on a sequential basis.
Advances increased 32% y-o-y to Rs98,265 crore on the back of 32% y-o-y growth in MSME Advances (constituting 16% of Total Advances), 29% y-o-y growth in Retail Advances (constituting 10% of Total Advances) and 36% growth in Corporate Advances (constituting 50% of Total Advances).
The Bank’s Deposits grew 33.5% y-o-y to Rs1,38,703cr during the quarter driven by Retail Term Deposits (66% y-o-y growth). The CASA ratio was stable sequentially at 30%, though it declined by 5 percentage points on a y-o-y basis.
Due to the substantial 90bp sequential fall in NIM from 3.7% to 2.8%, UBI’s Net Interest Income (NII) fell by a substantial 18% q-o-q, which was much below our expectation and evidencing the negative impact of premature PLR cuts by large PSU Banks in the wake of the rate cuts by the RBI due to likely government suasion.
In any case, NIMs (and consequently RoEs) in 3QFY2009 were unsustainably high (for large PSU banks in general) and we had expected compression in NIMs from 4QFY2009 onwards, though at a more gradual rate. NIMs are expected to stabilise 2QFY2010E onwards.
The Bank reported Net Profit de-growth of 11% y-o-y to Rs465cr (Rs521cr) in line with our expectation though NIMs were lower than expected on account of substantial Treasury gains.
However, Net Profit mainly fell on account of the one-time benefits registered in 4QFY2008 including reversal of AS-15 transitional provisions and negligible tax provisions. On the operating income front, UBI reported 30% y-o-y growth.
Outlook and valuation
At the CMP, the stock is trading at 4.2x FY2010E EPS of Rs37.9 and 0.9x FY2010E Adjusted Book Value of Rs168.9.
In our view, UBI is among the more profitable and competitive PSBs. We are positive on the Bank due to its robust traction in CASA Deposits and relatively faster network expansion than peers, due to which we expect it to post relatively higher growth in Earnings.
Moreover, in the near term, the Bank enjoys the advantage of having high NPA provision coverage, though its focus on the SME and Trade Segment could expose it to relatively higher asset quality pressures.
We maintain an ACCUMULATE rating on the stock, with a target price of Rs186, implying an upside of 15%.