Stock Market Result Update on Union Bank of India for 2QFY2012

Stock Market Result Update on Union Bank of India for 2QFY2012 with an Accumulate recommendation and a Target Price of `238 (12 months). 

For 2QFY2012, Union Bank of India reported disappointing numbers, which were far below ours as well as street’s estimates, primarily because of the considerably higher-than-expected provisioning expenses. Substantial deterioration in asset quality was the key negative surprise from the results. We downgrade the stock from Buy (on persistent stress on the asset quality) to Accumulate.

NIM improves on better CD ratio and loan yields; asset quality stress comes to the fore: The bank’s business growth was muted, with advances growing marginally by 1.2% qoq and deposits declining by 1.8% qoq. Even CASA deposits base was almost flat sequentially and grew by just 8% on a yoy basis. On the back of improvement in CD ratio and yield on advances, the bank’s reported NIM improved by 11bp qoq to 3.2%. On the asset-quality front, slippages ballooned to `1,821cr (annualized slippage ratio of 4.8%) from an average quarterly run rate of `640cr over the past 12 quarters. Management attributed a large part of the rise in slippages to the completion of the switchover to system-based NPA recognition platform. Absolute amounts of gross and net NPAs rose sharply by 37.1% qoq and 56.3% qoq, respectively. Provision coverage ratio including technical write-offs slipped sharply by 772bp qoq to 60.5%.

Outlook and valuation: In our view, Union Bank of India is structurally among the more profitable and competitive PSU banks. We have a positive outlook on the bank due to its robust traction in CASA deposits and relatively fast-expanding branch network over the past few years. The asset quality stress seems to have been largely factored into the price, in our view. Going ahead, pick-up in recoveries from the technically slipped accounts is likely to cushion further stress. The stock is trading at reasonable valuations of 0.8x FY2013E P/ABV, well below its five-year median of 1.3x. Hence, we recommend an Accumulate rating with a target price of `238.