Union Bank of India’s stock had outperformed the Bankex on the Bombay Stock Exchange during the rally beginning September, fuelled by hopes that the concerns that investors had with the bank on asset quality would recede.

Unfortunately, that hasn’t happened so far, judging by the bank’s results for the September quarter. Bad loans have increased substantially, with gross non-performing assets (NPAs) rising from 2,736 crore at the end of June to 3,524 crore by the end of September. As a percentage of advances, they rose from 2.19% in end-June to 2.79% by end-September.

The slippages in asset quality have led to higher provisions, with the result that net profit for the September quarter, at 304 crore, was not just below analyst expectations, but also 39.8% below the net profit for the year-ago period. It’s interesting to note that operating profit rose by 39.6% year-on-year (y-o-y), which shows how much provisions have increased. Even so, the provision cover slipped from 71.1% at the end of June to 70%.

Graphic: Yogesh Kumar/Mint

While Union Bank’s performance has been overshadowed by the rise in bad loans, it points out that of the 1,130 crore that have slipped into bad debts, 417 crore is because of the farm debt waiver and 310 crore “on account of the global meltdown". It says that “going forward, although there would be slippages in Q3 and Q4 of 2011, the pace of slippages is expected to reduce".

But the bank had, at the time of declaring its June quarter results, guided for gross NPAs of below 2.1% by end-March 2011. After the September results, they’ve increased that target to “below 2.3%". Moreover, they’ve also brought down their targets for return on equity and return on average assets for 2010-11 from 25% and 1.25%, respectively, to 22% and 1.17%.

No wonder the stock corrected by 5.85% on Wednesday.