Most banks have been waltzing while the economy crumbled during the last quarter and Union Bank of India has been having a particularly good time. Net profit in the December quarter was up 84%. Part of the reason was a big fall in provisions compared with the year-ago period. Growth in operating profit has been a more muted 34%.
Nevertheless, the bank has also done well in its core lending business, as evident from the 50% rise in net interest income. The primary reason for this has been expansion in margins. The bank’s net interest margin for the December quarter was 3.22%, compared with 2.70% in the year-ago period and 3.01% margin notched up in the September quarter.
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Unlike some banks that contracted their advances during the last quarter, Union Bank’s outstanding advances were a good 7.4% higher at the end of the December quarter than at the end of the September quarter. Asset quality was at the same level as at end-September, with the net non-performing assets (NPA) ratio at a very low 0.14%. The gross NPA ratio improved from the September level, falling from 1.93% to 1.68%. Provisions cover as much as 91.85% of NPAs, a bit lower than the 93% coverage at the end of September but still very satisfactory.
One possibly negative feature of Union Bank’s December quarter results was the lack of growth of its non-interest income. The other is a slowdown in its growth of demand deposits, which was 19.9% year-on-year at the end of December quarter, compared with 24.5% at the end of September quarter.
The stock fell by 2.4% on the Bombay Stock Exchange (BSE) on Friday, on a day when the BSE Bankex was down 4.16%, and has bounced back 27% from its October lows, easily outperforming the Bankex. The Union Bank stock is being traded at 1.1 times book value, which is cheap.
With lending rates coming down and with a deteriorating economic environment leading to higher non-performing assets in future, it’s possible that conditions may not be as favourable as in the last quarter.
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Graphics by Ahmed Raza Khan / Mint