Union Bank of India BANKING. Stable growth; but NIMs soar. Q3FY10 Result update. INDIA Institutional Research

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1 INDIA Institutional Research BANKING Analyst: Anand Dama Date: 29 th January, 21 Stable growth; but NIMs soar PAT surpasses expectation: Bank s PAT at Rs5.34bn (2%YoY decline but 6%QoQ growth) was higher than our estimate of Rs4.51bn, primarily owing to lower NPA provisions, better NII and other income growth. Adjusting for high MTM provision on investments of Rs2.9bn during Q3FY9, PAT growth on YoY basis would have been better. NIM bounces back; credit growth improves sequentially: Banks margin improved significantly by about 37bpsQoQ to 2.71%, after a stable last quarter, when most banks witnessed margin expansion. Credit growth too witnessed strong sequential expansion by about 7%QoQ, but grew at a stable pace of 15%YoY to Rs165bn. However, unlike Q3FY9 (due to liquidity crisis), deposit growth has been consciously slowed down to about 16.5%YoY, leading to better C D ratio. Asset quality and provision cover slips: GNPA increased by 9%QoQ (GNPA ratio by just 3bp to 1.96%), however, NNPA spiked by 175%QoQ (NNPA ratio by 35bps to.6%). Provision coverage ratio, which has been on average above 8%, too slipped to 71%. We believe that considering banks provision coverage ratio being much above RBI s recommended ratio, bank has allowed its provision cover to fall, which led to significant increase in NNPA. Recommend accumulate: The stock currently trades at 1.3x FY11E and 1.x FY12E adj. BV. We reiterate our accumulate rating on the stock with a revised target price of Rs28 (from Rs258), on account of revision in estimates upward for FY1. Q3FY1 Result update Rating Accumulate Target Price Rs28 CMP Rs255 Upside 1% Nifty 4867 Key Data Bloomberg Code UNBK IN Reuters Code UNBK.BO NSE Code UNIONBANK Current Share o/s (mn) 55.1 MktCap (Rsbn/USDmn) 128.9/ Wk H/L (Rs) 29.5/115.5 Daily Vol.(3M NSE Avg) Face Value (Rs) 1 Beta.95 1USD/INR 46.3 Price Performance (%) 1m 6m 1yr UNIONBANK NIFTY Source: Bloomberg;*As on 28 th Jan, 21 Profit/Loss A/c (Rs mn) Q3FY1A Q3FY9A YoY(%) Q2FY1A QoQ(%) Q3FY1E Variance(%) Interest Earned 32,936 32,584 32,56 34,148 Interest Expended 22,289 21,333 23,422 23,78 Net Interest Income 1,647 11, , , Other Income 4,648 3,954 5,553 4, Other Income/Net Income(%) bp bp bp Net Income 15,294 15, , , Employee expenses 3,245 3,225 3,59 3,176 Non Employee expenses 2,97 3,432 3,28 2,766 Operating Expenses 6,152 6, , , Cost income ratio(%) bp bp bp Pre Prov Profits 9,142 8, , , Provisions & Contingencies 1,611 (449) 1,35 2,25 PBT 7,531 8, , , Provision for taxes 2,19 2,28 1, ,841 Effective Tax Rate (%) PAT 5,341 6,717 (2.5) 5, ,

2 PAT surpasses expectation Banks PAT at Rs5.34bn (2%YoY decline but 6%QoQ growth) was higher than our estimate of Rs4.51bn, primarily owing to lower NPA provisions, better NII and other income growth. Adjusting for high MTM provision on investments of Rs2.9bn during Q3FY9, PAT growth on YoY basis would have been better. Bank registered strong 23%QoQ NII growth, on account of better credit growth and sequential decline in interest expenses. Other income growth though muted (12%QoQ de growth), came in above expectation owing to better treasury gains. Factoring in lower provisions and better than expected other income, we revise our PAT estimates for FY1 by 9.3% and expect PAT CAGR of 17% over FY9 12E. Exhibit 1: Better NII growth & lower provision supported PAT growth Rsbn QFY QFY QFY QFY QFY9 PAT (Rs bn) NII growth (QoQ) Non interest income growth (QoQ) NIM bounces back; scope for further improvement 4.7 3QFY QFY QFY1 Bank s NIM improved significantly by about 51bpsYoY and 37bpsQoQ to 2.71%, after a stable last quarter (when most banks witnessed margin expansion). Such a stellar recovery in margins during the quarter has been primarily on account of sharp fall in cost of deposit by about 77bpsYoY and 52bpsQoQ, as against 138bpsYoY and 5bpsQoQ improvement in yields on advances. Bank has shed about Rs324bn of high cost deposits (carrying interest rate above 9%p.a) during past 9 months. Thus reduction in high cost deposits, primarily accrued during peak of liquidity crisis, along with strong CASA growth of about 17% during past 9 months has helped bank witnessing significant fall in cost of deposits. Bank expects about 16bps improvement in cost of deposits in Q4Y1 due to further re pricing of deposits, implying that UBI will continue to witness improvement in NIMs in next quarter as well, unlike other PSU banks that are believed to have reaped in almost full benefit from re pricing of deposits. Exhibit 2: NIMs expand 37bpsQoQ during Q3FY QFY1 5 % QFY8 4QFY8 1QFY9 2QFY9 3QFY9 4QFY9 1QFY1 2QFY1 3QFY1 2

3 Credit growth improves sequentially Credit growth witnessed strong sequential expansion by about 7%QoQ, but grew at a stable pace of 15%YoY to Rs165bn. Sequential credit growth has been primarily contributed by retail (25%QoQ) and agriculture (12.4%). We remain concerned on banks increasing agricultural portfolio considering weak monsoon and also farm loan waiver recovery, which has been really poor. Unlike Q3FY9 when deposit growth was above 3% (due to liquidity concerns), deposit growth has been consciously slowed down to about 16.5%YoY during the quarter, leading to better C D ratio at about 7.5% (improved by 381bpsQoQ). Exhibit 3: Credit growth improves sequentially QFY8 4QFY8 1QFY9 2QFY9 3QFY9 4QFY9 1QFY1 2QFY1 3QFY1 Credit growth (QoQ) Credit growth (YoY) Asset quality and provision cover slips GNPA increased by 9%QoQ (GNPA ratio by just 3bp to 1.96%), however, NNPA spiked by 175%QoQ (NNPA ratio by 35bps to.6%. Incremental slippages during the quarter have been high to the tune of Rs4.7bn. However this does not include Rs3bn of farm loan waiver relief dues, which if included would further bloat bank s NPAs. Provision coverage which has been on average above 8% and thus comforting too slipped to 71%. We believe that considering banks provision coverage ratio being much above RBI s recommended ratio, bank has allowed its provision cover to fall, which led to significant increase in NNPA. However, including technical w/offs provision coverage ratio would be at 8%. During the quarter, bank has additionally restructured about Rs1.31bn of loans, whereas it has fully settled about Rs2.4bn worth of restructured loans during 9mFY1. About Rs2.3bn i.e 1.6% of avg. restructured loans slipped in to NPAs. Overall stressed assets remain elevated at about 6.4% including restructured assets of about 4.4%. Bank expects that 7% of restructured loans run a risk of turning in to NPA s. Exhibit 4: NNPAs spike due to fall in provision cover % QFY8 4QFY8 1QFY9 2QFY9 3QFY9 4QFY9 1QFY1 2QFY1 3QFY GNPA (%) NNPA (%) Provision coverage 3

4 Reiterate accumulate with a revised target price of Rs28 The stock currently trades at 1.3x FY11E and 1.x FY12E adj. BV. Bank s major strengths are its strong return ratios (above 2%) with sound asset quality. However, concerns remain on capital constraint, which could affect banks growth plans in long run. Bank has already forwarded proposal to the government for fund raising, however, has been pending since fairly long time. Any positive news on the same should address concerns on banks below 9% optimal Tier I capital. We reiterate our accumulate rating on the stock with a revised target price of Rs28 (from Rs258), on account of revision in estimates upward for FY1. Exhibit 5: One year forward P/Adj BV Oct 2 Feb 3 Jul 3 Nov 3 Apr 4 Sep 4 Jan 5 Jun 5 Oct 5 Mar 6 Aug 6 Dec 6 May 7 Sep 7 Feb 8 Jul 8 Nov 8 Apr 9 Aug 9 Jan 1 UBI Source: Bloomberg, Networth Research 4

5 Financial Summary Income Statement Y/E March FY8 FY9 FY1E FY11E FY12E Y/E March FY8 FY9 FY1E FY11E FY12E Interest Earned 92, , , ,559 19,441 Bal. Sheet Ratios (%) Interest Expended 63,61 8,758 92,471 15, ,43 Loans/Deposits Net Interest Income 28, , , , ,11.4 CASA Ratio Growth (%) Loan Growth Non Interest Income 13,196 14,825 2,297 19,936 21,323 Deposit Growth Growth (%) (1.8) 7. Operating Ratios (%) Fee, forex & other income 1, , , , ,323.2 NIM Net Income 41, , , , ,334.6 Non int inc/net income Growth (%) Empl / Total Op Costs Operating Expenses 15, , , , ,994.7 Cost/Income Growth (%) Operating cost growth Employee expenses 8,453 11,519 12,659 14,495 17,14 Total provi/avg. loans Other expenses 7,477 1,622 11,471 13,666 16,855 Credit Qual. Ratios (%) Pre Prov Profits 25,83.4 3, , ,56.7 5,339.9 Gross NPA Provisions & Cont 7,289 7,255 7,34 1,499 12,13 Net NPA Loan loss provisions 5,852 5,465 7,136 9,868 1,181 Slippage PBT 18, , , ,7.3 38,236.8 NPL coverage ratio Provision for taxes 4,644 6,3 7,845 9,77 1,76 Capital Adeq Ratios (%) PAT 13, ,265. 2, , ,53.5 Total CAR Growth (%) Tier 1 CAR Profitability Ratios (%) RoAE RoAA Valuations Ratios BVPS (Rs) Price/BV (x) Adjusted BVPS (Rs) Price/Adj BV (x) Balance Sheet Rs mn EPS (Rs) Y/E March FY8 FY9 FY1E FY11E FY12E P/E (x) Cash and balance with RBI 94,547 89,921 92,73 118,67 142,58 Dividend Yield Inter bank money 6,431 69,929 64,358 76,264 8,411 Loans 743, ,342 1,134,277 1,361,133 1,66,582 Dupont Analysis Investments 338, ,97 522,91 6, ,214 Y/E March FY8 FY9 FY1E FY11E FY12E Total int earning assets 1,182,688 1,555,161 1,814,248 2,156,586 2,595,265 % of Average assets Fixed Assets 22,4 23,352 23,824 24,29 24,67 Net Interest Income Other Assets 38,989 34,864 38,82 36,779 39,438 Non Interest Income Total Assets 1,243,681 1,613,376 1,876,874 2,217,655 2,659,373 Net Income Deposits 1,38,586 1,387,28 1,68,953 1,96,69 2,297,464 Operating Expenses (1.4) (1.5) (1.4) (1.4) (1.4) Other Int bearing Liab 85,15 87,749 16,245 12,56 134,672 Operating Profit Total Interest bearing liab 1,123,691 1,474,777 1,715,198 2,26,665 2,432,136 Provisions (.6) (.5) (.4) (.5) (.5) Other non int bearing liab 46,513 51,196 56,215 64,232 76,333 Taxes (.4) (.4) (.4) (.4) (.4) Total Liabilities 1,17,24 1,525,973 1,771,413 2,9,897 2,58,469 RoA (%) Networth 73,477 87,44 15, ,757 15,94 Avg.assets/avg equity (x) Total Liabilities & Equity 1,243,681 1,613,376 1,876,874 2,217,655 2,659,373 RoE (%)

6 Networth Research: E mail research@networthdirect.com Satish Pasari Head Institutional Business satish.pasari@networthdirect.com / Equity Research Anand Dama Banking & Financial Services anand.dama@networthdirect.com Sanjeev Hota IT / Education sanjeev.hota@networthdirect.com Ashwani Sharma Power / Capital Goods ashwani.sharma@networthdirect.com Kanika Bihany Dugar Engineering / Capital Goods kanika.bihany@networthdirect.com Chintan Mehta Metals/Mining chintan.mehta@networthdirect.com Rupali Nambiar Economy rupali.nambiar@networthdirect.com Derivatives & Technical Research Akshata Deshmukh Sr. Technical & Derivatives Analyst akshata.deshmukh@networthdirect.com Manoj Karnani Sr. Manager Derivatives manoj.karnani@networthdirect.com Amol Shrivastava Derivatives Analyst amol.shrivastava@networthdirect.com Gaurav Soni Derivatives Analyst gaurav.soni@networthdirect.com Ankit Bhat Research Associate ankit.bhat@networthdirect.com Quantitative Research Shubha Aggarwal Research Analyst shubha.aggarwal@networthdirect.com Ritesh Jain Research Analyst ritesh.jain@networthdirect.com Sales dealing@networthdirect.com Prakash Diwan Head Institutional Sales & Strategy prakash.diwan@networthdirect.com / Nilesh Sangani AVP Institutional Sales and Dealing nilesh.sangani@networthdirect.com Ronak Maniar Sr. Manager Institutional Sales & Dealing ronak.maniar@networthdirect.com Shalaka Jadhav Sr. Manager Institutional Sales & Dealing shalaka.jadhav@networthdirect.com / Key to NETWORTH Investment Rankings Buy: Upside by>15, Accumulate: Upside by +5 to 15, Hold: Upside/Downside by 5 to +5, Reduce: Downside by 5 to 15, Sell: Downside by>15 Disclaimer: This document has been prepared by Networth Stock Broking Ltd. 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