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Union Bank of India - Investment Call
Friday, June 8, 2007
Improved NII in Q4FY07
The NII for the quarter rose 41% YoY as the bank slowed down the loan growth and preferred to focus on segmental growth with better margins. As a result, the bank has been able to better the margins overall for the year as well as for the quarter. The YoY growth in NII after adjusting for the one time items in interest earnings stands approximately at 27.6%. The bank had some one time extraordinaries in interest earnings in Q4FY07 of Rs.1,020m which includes CRR interest of Rs.2,700m whereas the bank received Rs.1,780 as interest on tax refund in Q4FY06.
Business growth calibrated as loan growth slowed down Union Bank has deliberately calibrated the loan growth post 1HFY07 with the result that the high growth witnessed in the beginning of FY07 was replaced by a slower growth 2HFY07. The loan growth for the year stands at 19% YoY while the demand deposits registered a 15% YoY growth. The overall business of the bank has shown a growth of 15.6% YoY. Union Bank was able to improve CASA by 214bps in FY07 to 34.5%. However, the bank’s CASA has remained at these levels for the last two years and we feel that Union Bank may not be able to ‘substantially’ improve from present levels. We expect the bank to add a modest 100-150bps more to the CASA. Hence, the margin improvement going forward should happen more because of borrowing at card rates.
Other income shows good growth
Union Bank’s core fee income has also shown a strong improvement in the Q4 as well as FY07. The core fee income for the year has grown by 25.7% YoY to Rs.2,180m whereas the growth has been stronger in Q4FY07 at 38.7%. The recoveries in writtenoff accounts have progressed well causing further other income growth.
NPL’s decline, asset quality improves further
The bank’s gross NPL’s have declined 90bps to 2.94% and the net NPL’s have slid below 1% to 0.96%. The NPA coverage has also gone up from 60.3% in FY06 to 67.9% in FY07. There also has been a decrease in absolute terms from Rs.20,980m to Rs.18,730m.
Capital adequacy improves
The bank’s CAR has improved to 12.8% from 11.4% in FY06. The bank plans to raise further capital in FY08 through issue of Tier II and other innovative instruments. Union Bank intends to raise about Rs.15bn towards meeting Basel II and future growth purposes. The bank is confident of maintaining the CAR at +11% after meeting the Basel II requirements.
Valuation
Union Bank trades at a P/E multiple of 7.24 calculated on it’s FY07 annualised EPS Rs.16.3. The FY07 BV Rs.93.6 discounts the CMP of Union Bank 1.3x. With good earnings outlook, we see further upside in Union Bank.
The NII for the quarter rose 41% YoY as the bank slowed down the loan growth and preferred to focus on segmental growth with better margins. As a result, the bank has been able to better the margins overall for the year as well as for the quarter. The YoY growth in NII after adjusting for the one time items in interest earnings stands approximately at 27.6%. The bank had some one time extraordinaries in interest earnings in Q4FY07 of Rs.1,020m which includes CRR interest of Rs.2,700m whereas the bank received Rs.1,780 as interest on tax refund in Q4FY06.
Business growth calibrated as loan growth slowed down Union Bank has deliberately calibrated the loan growth post 1HFY07 with the result that the high growth witnessed in the beginning of FY07 was replaced by a slower growth 2HFY07. The loan growth for the year stands at 19% YoY while the demand deposits registered a 15% YoY growth. The overall business of the bank has shown a growth of 15.6% YoY. Union Bank was able to improve CASA by 214bps in FY07 to 34.5%. However, the bank’s CASA has remained at these levels for the last two years and we feel that Union Bank may not be able to ‘substantially’ improve from present levels. We expect the bank to add a modest 100-150bps more to the CASA. Hence, the margin improvement going forward should happen more because of borrowing at card rates.
Other income shows good growth
Union Bank’s core fee income has also shown a strong improvement in the Q4 as well as FY07. The core fee income for the year has grown by 25.7% YoY to Rs.2,180m whereas the growth has been stronger in Q4FY07 at 38.7%. The recoveries in writtenoff accounts have progressed well causing further other income growth.
NPL’s decline, asset quality improves further
The bank’s gross NPL’s have declined 90bps to 2.94% and the net NPL’s have slid below 1% to 0.96%. The NPA coverage has also gone up from 60.3% in FY06 to 67.9% in FY07. There also has been a decrease in absolute terms from Rs.20,980m to Rs.18,730m.
Capital adequacy improves
The bank’s CAR has improved to 12.8% from 11.4% in FY06. The bank plans to raise further capital in FY08 through issue of Tier II and other innovative instruments. Union Bank intends to raise about Rs.15bn towards meeting Basel II and future growth purposes. The bank is confident of maintaining the CAR at +11% after meeting the Basel II requirements.
Valuation
Union Bank trades at a P/E multiple of 7.24 calculated on it’s FY07 annualised EPS Rs.16.3. The FY07 BV Rs.93.6 discounts the CMP of Union Bank 1.3x. With good earnings outlook, we see further upside in Union Bank.
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Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective.The information contained herein is based on analysis and up on sources that we consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it.& take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations given in this blog.
