Stock Market Result Update on United Bank of India for 2QFY2012 with a Buy recommendation and a Target Price of `82 (12 months).
For 2QFY2012, United Bank registered 13.7% yoy growth in its net profit to `125cr, above our estimates due to higher non-interest income than estimated by us. We recommend a Buy rating on the stock.
Chunky slippages witnessed during 2QFY2012; NIM improves sequentially: For 2QFY2012, the bank’s advances grew by 3.2% qoq to `54,304cr, while deposits declined by 1.5% qoq to `78,244cr. Savings deposit growth grew by 2.4% qoq; however, current deposits declined by 5.8% qoq, leading to a dip of 37bp in CASA ratio to 39.9% (40.2% as of 1QFY2012). During the quarter, with rising cost of deposits for the system as a whole, the bank’s cost of deposits increased by 25bp qoq to 6.6%. However, the bank was able to increase its yield on advances by 54bp qoq, leading to a sequential expansion of 14bp in reported NIM. Non-interest income declined by 4.6% qoq (up 6.9% yoy) to `162cr, mainly due to a sequential 29.0% decline in treasury income to `47cr. Income from recoveries was also poor, declining by 19.1% qoq to `16cr. The bank switched over accounts worth `5lakhs and below to system-based NPA recognition in 2QFY2012. Management indicated that the switchover did not have any material impact on the asset quality and higher slippages witnessed during the quarter were due to three large corporate accounts (~`314cr out of total `621cr slippages), which became non-performing during 2QFY2012. Consequently, gross NPA ratio and net NPA ratio deteriorated to 3.5% and 2.2% in 2QFY2012 from 2.9% and 1.7% in 1QFY2012, respectively.
Outlook and valuation: UBI has a favorable deposit franchise, as reflected in its strong CASA ratio of 39.9% as of 2QFY2012. At the CMP, the stock is trading at P/ABV multiple of 0.6x FY2013E P/ABV. We have assigned a target FY2013E P/ABV multiple of 0.7x and, hence, we recommend a Buy rating on the stock with a target price of `82.
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