Contrary to the industry trend, Union Bank of India’s (UBI’s) loan book growth has distinctly accelerated in the past few quarters.
In 9m FY09, bank’s advances have grown strongly by 22.8% YTD implying an annualized growth of 30.4% y-o-y.
The brisk growth has been driven by the bank’s focus on more resilient semi-urban and rural India.
We estimate UBI’s loan growth at 27% in FY09, 24% in FY10 and 19% in FY11. After expanding by 60 bps over Q1-Q3 FY09, bank’s NIM is expected to dip by 10-20 bps q-o-q in Q4 FY09 due to recent reduction in BPLR and retail lending rates. In FY10E and FY11E, NIM is expected to remain stable near 3%.
Despite believing that UBI carries a resilient and better-than-peer loan book, we factor deterioration in its asset quality due to macro headwinds.
We anticipate Gross NPLs of the bank to double by FY11 and reach 2.4% of advances. UBI has defied the weakness witnessed in banking stocks in the past six months buoyed by its robust business performance in past two quarters.
Since September 2008, the stock has outperformed Bankex by 25% and the bank’s valuation discount to SBI has shrunk to ~30%.
We believe that relative strengths of UBI are fully priced in now and a similar outperformance to the sector in the near-term is unlikely.
At present, the stock is nearly fairly priced at 0.7x 1-year rolling adj P/BV. Based on Bank 20 (our proprietary valuation model for banks) score of 3.62 and adjudged premium, we assign a 0.8x P/BV multiple to the bank’s FY10E adjusted BV and arrive at 1-year price target of Rs139.
We rate UBI as MARKET PERFORMER.