2QFY18 Result Update November 8, 217 Market Cap. (Rs bn) 125 Free Float 37 Shares O/S (mn) 726 PSB Recap A Big Positive; but Earnings to Remain Tepid With lower fresh slippages (lowest in last 8 quarters) and remarkable improvement on asset quality front, (UBI) has positively surprised market in 2QFY18. The Management chosen to strengthen the balance sheet over profitability by increasing Provision Coverage Ratio (PCR) to 49.1% (sans technically w/o loans) and 56.1% (with technically w/o loans) in 2QFY18 compared to 44.3%/51.1% in 1QFY18 and 43.3%/5.4%, respectively in 2QFY17. As a result the provisioning expenses increased by 119.4% YoY and 18.6% QoQ to Rs35.6bn, for which the Bank incurred the first ever net loss of Rs15.3bn in current credit business cycle. However, the Bank s loan book grew by 4.5% QoQ and 9.7% YoY, while its average CASA ratio improved to 34.1% in 2QFY18 compared to 33.9% in 1QFY18. Management Commentary & Guidance The Bank expects loan book, deposit and CASA ratio to grow by 8-1%, 7-8% and 35%, respectively in FY18. It expects slippages ratio and credit cost at ~4.4% and ~3.3% respectively for FY18. The Bank envisages gradual improvement in stressed assets, as most of the recognition has already been done. Its total stressed loan (GNPA + Std. Restructured) stood at 14.1% in total loan book. The Bank s SMA-2 balance substantially declined to 4.4% of loan book (Rs13.6bn) compared to 6.8% of loan book in 1QFY18 and 5.4% in 2QFY17. Though the Bank is yet to receive the RBI s final report on Annual Supervisory Assessment for FY17, the Management does not expect any major divergence. The Management highlighted that the strategy of growing Retail, Agriculture and MSME business is moving in right direction (contribution of RAM stood at 54.1% vs. 53.8% in 4QFY17) led by improvement in retail liability as well as retail loan. Credit cost is expected to increase marginally, as the Bank is looking forward to further improve its PCR to >6% in coming period from the current level of 56.1%. Notably, the Management expects higher upgrade and recovery in current fiscal to support PCR. Outlook & Valuation UBI is one of the most capital-starved public sector banks. Its CET1 stood at 7% in Sep 17, which is barely few bps above minimum regulatory requirement. We expect the Bank can be one of the major beneficiaries of recently announced mega PSB recapitalisation plan, as higher recapitalisation will help the Bank to come out of the capital insuiciency situation and return strongly on the growth path. However, the Bank may continue to witness elevated level of credit cost, which may keep its earnings and return ratios subdued over next 3-6 quarters. Hence, we continue to maintain our recommendation on the stock with an unrevised Target Price of Rs164 based on 1.1x FY19E Adjusted book value. Key Financials E FY19E NII 83,131 89,33 97,184 114,971 PPP 56,426 74,31 75,96 92,729 PAT 13,516 5,552 (9,57) 12,11 EPS (Rs) 19.7 8.1 (12.5) 16.5 P/E (x) 8.4 2.6 (13.3) 1. Adj. BV (Rs) 193.4 168.2 149.7 163.6 P/Adj. BV (x).9 1. 1.1 1. Gross NPA 9. 11.8 12.3 9.3 Net NPA 5.2 6.6 5.8 4.2 Avg. ROA.3.1 (.2).2 Avg. ROE 5.9 2.4 (3.9) 5. Share price 1 mth 3 mth 12 mth Absolute performance 27.8 14.4 24. Relative to Nifty 24.1 11.6 1.2 Shareholding Pattern Jun 17 Sep'17 Promoter 63.4 65.4 Mutual Funds 9.3 7.2 Insurance Companies 11.1 1.5 Foreign Portfolio Investors 5.5 6.1 Others 1.7 1.9 Total 1. 1. 1 Year Stock Price Performance 22 19 16 13 1 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Note: * CMP as on Nov. 7, 217 Research Analyst : Asutosh Kumar Mishra Contact : 22 3321323 Email : asutosh.mishra@relianceada.com 1
Risks to the View Downside Risk: Any major slowdown in economy may adversely impact the Bank s asset quality. Upside Risk: Higher than expected business growth and accelerated resolution of the stressed assets. Exhibit 1: Income Statement Analysis 2Q FY18 2Q FY17 % yoy / bps 1Q FY18 % qoq / bps 1H FY18 1H FY17 % yoy / bps Interest on Advance 57,543 58,171 (1.1) 57,377.3 114,919 115,86 (.8) YoA - Calculated 8.1 8.9 (83) 8.1 (4) 8.1 8.9 (8) Income on Investment 21,949 21,43 4.3 21,477 2.2 43,425 39,88 9.1 Interest on Balances 2,588 2,183 18.5 2,55 1.5 5,138 4,163 23.4 Others Interests 145 685 (78.8) 127 14.4 272 1,71 (74.6) Interest Earned 82,224 82,81.2 81,53.9 163,754 16,848 1.8 Interest Expended 59,17 59,37 (.5) 59,14 (.1) 118,121 117,51.9 CoF - Calculated 5.2 5.8 (58) 5.4 (15) 5.2 5.7 (5) Net Interest Income 23,27 22,774 1.9 22,426 3.5 45,633 43,797 4.2 NIM - Calculated 2.2 2.4 (2) 2.2 2.3 (15) NIM - Reported 2.3 (22) 2 NA NA NA NII as % of Oper. Income 65.6 66.7 (16) 61.3 427 63.4 66.8 (335) Core Fee Income 5,49 4,98 1.2 6,6 (9.4) 11,55 9,55 2.9 Fee Inc. as % of OI 15.5 14.6 94 16.6 (15) 16.1 14.6 1 Non Core Fee Income 6,683 6,414 4.2 8,87 (17.4) 14,77 12,243 2.6 Non core fee Inc. as % of OI 18.9 18.8 12 2 (322) 2.5 18.7 1 Total Other Income 12,173 11,394 6.8 14,147 (13.9) 26,32 21,793 2.8 Other Inc. as % of OI 34.4 33.3 16 38.7 (427) 36.6 33.2 335 Operating Income (OI) 35,381 34,169 3.5 36,573 (3.3) 71,953 65,59 9.7 Core Operating Income 28,697 27,754 3.4 28,486.7 57,183 53,347 7.2 Employees Expenses 8,58 8,736 (7.8) 8,213 (1.9) 16,271 17,326 (6.1) Employees Expn. as % of OI 22.8 25.6 (279) 22.5 32 22.6 26.4 (38) Other Operating Expenses 7,933 7,236 9.6 7,794 1.8 15,727 13,817 13.8 Other Opert Exp. as % of OI 22.4 21.2 125 21.3 111 21.9 21.1 79 Total Operating Expenses 15,991 15,972.1 16,7 (.1) 31,998 31,143 2.7 Cost to income Ratio 45.2 46.7 (155) 43.8 143 44.5 47.5 (31) Operating Profit (OP) 19,39 18,197 6.6 2,566 (5.7) 39,956 34,448 16. Provisions and Conting. 35,547 16,23 119.4 17,37 18.6 52,584 29,733 76.9 Pro Burden as % of OP 183.3 89. 9,429 82.8 1,49 131.6 86.3 4,529 Profit Before Tax (16,157) 1,994 (91.2) 3,529 (557.9) (12,628) 4,715 (367.8) Tax Expenses (85) 227 (473.7) 2,363 (136.) 1,513 1,285 17.7 Eective Tax Rate 5.3 11.4 (614) 67. (6,17) (1) 27.3 (3,924) Net Profit (15,37) 1,767 (966.4) 1,166 (1,413.) (14,141) 3,43 (512.3) EPS (21.9) 2.6 (951.1) 1.7 (1,386.6) (2.2) 5. (54.3) 2
Exhibit 2: NIM witnessed improvement in 2QFY18 led by lower cost of funds Exhibit 3: NII growth improved sequentially led by higher share of RAM segments 2.5 2.4 2.3 2.2 1.9 1.8 2.4 2.3 2.3 2.3 2.3 2.3 2.2 26, 24, 22, 2, 18, 2.2 2.2 1.9 2.3 2.2 1.9 1.8 1.7 NII (LHS) NII as % of Avg. Assets Exhibit 4: Other income growth remained subdued led by lower treasury profit 16, 12, 8, 4, 26.9 31.3 3.9 32.3 33.1 33.3 38.5 37.7 38.7 34.4 5. 4. 3. 2. 1.. Exhibit 5: Operating expenses remained subdued as UBI focused towards contorting other opex 18, 16,5 15, 13,5 12, 48.9 51.3 53.8 54.2 48.3 46.7 46.7 44.3 43.8 45.2 6 45 3 15 Other Income OI as % of Operating Income Operating Expenses C/I Ratio Exhibit 6: The Bank frontloaded provision on loans referred to NCLT, which led to sharp surge in PCR Exhibit 7: Higher provisioning and lower operating profit negatively impacted UBI s bottom-line 4, 3, 2, 1, 43.2 29. 92.8 111. 83.3 89. 9.2 114.5 82.8 183.3 2 16 12 8 4 1 5 (5) (1) (15) -21.9 77.2-74. -78.3-67.9-73.2 32.4 12.6-29.9-966.4 4.. (4.) (8.) (1,2.) Provision Expenses Provision as % of OP PAT (LHS) Growth YoY (RHS) 3
Exhibit 8: Balance Sheet Analysis (Rs bn) 2Q FY17 3Q FY17 4Q FY17 1Q FY18 2Q FY18 QoQ % / bps YTD % / bps YoY % / bps Net Worth 234.4 235.8 234.4 235.3 226.1 (3.9) (3.5) (3.6) Deposit 3,615 3,798 3,784 3,758 3,86 2.7 6.8 Savings Deposits 96 1,11 1,41 1,48 1,75 2.6 3.3 18.7 Current Deposits 235 296 262 287 221 (23.) (15.9) (5.9) CASA Deposit 1,14 1,397 1,33 1,334 1,296 (2.9) (.6) 13.7 Term Deposit 2,474 2,41 2,481 2,424 2,564 5.8 3.4 3.6 Investments 1,19 1,352 1,121 1,215 1,284 5.7 14.5 7.9 Advances 2,652 2,627 2,865 2,784 2,99 4.5 1.5 9.7 Total Business 7,457 7,777 7,77 7,757 8,53 3.8 3.6 8. Avg Int. Earning Assets 3,961 4,252 4,26 4,355 4,463 2.5 6.1 12.7 Risk Weighted Assets 2,813 2,819 2,912 2,868 2,93 1.2 (.3) 3.2 CAR 11.2 11.4 11.8 1 11.2 (79) (57) 3 Tier I Capital 8.6 8.5 9. 9.2 8.5 (74) (52) (6) Exhibit 9: Loan book growth was driven by RAM and domestic corporate segments Exhibit 1: Deposit growth was led by retail term and saving deposits (Rs bn) (Rs bn) 3 2 1 (1) (2) (3.) (.8) 3. 5.4 (3.9) 3.2 (1.) 9.1 (2.8) 4.5 12 8 4 (4) (8) 3 2 1 3.3 1. (1.) 4.7 (1.2) 6.7 5.1 (.4) (.7) 2.7 9. 6. 3.. (1) (3.) Incremental loan disbursement (LHS) Adv. Gr. qoq Incremental Deposit Mobilization (LHS) Deposit Gr. qoq (RHS) Exhibit 11: Loan Book Analysis 2Q FY17 3Q FY17 4Q FY17 1Q FY18 2Q FY18 QoQ % / bps YTD % / bps YoY % / bps Agriculture 411,59 47,23 441,24 44,92 429,9 (2.7) (2.8) 4.3 MSME 582,68 57,97 619,13 66,76 622,55 2.6.6 6.8 Large Corporate & Other 1,18,61 999,45 1,16,36 1,17,76 1,8,91 6.1 (2.3) 6.1 Retail Advances 374,92 376,23 43,8 423,57 447,39 5.6 1.8 19.3 Overseas 264,8 272,71 294,46 294,92 329,38 11.7 11.9 24.4 Exhibit 12: Loan Book Analysis (% Break Up) 2Q FY17 3Q FY17 4Q FY17 1Q FY18 2Q FY18 QoQ % / bps YTD % / bps YoY % / bps Agriculture 15.5 15.5 15.4 15.8 14.8 (19) (65) (77) MSME 2 21.7 21.6 21.8 21.4 (39) (21) (57) Large Corporate & Other 38.4 38.1 38.6 36.6 37.1 58 (147) (125) Retail Advances 14.1 14.3 14.1 15.2 15.4 17 129 125 Overseas 1. 1.4 1.3 1.6 11.3 73 15 134 4
Exhibit 13: Management is targeting average CASA ratio of 34-35% by Mar 18 (Rs bn) 1,6 1,2 8 4 28.3 28.6 3.6 32.3 31.5 31.5 36.8 34.4 35.5 33.6 4. 3. 2. 1.. Exhibit 14: PSB recap plan is expected to provide much-needed fillip to UBI on capital front 15 12 9 6 3 1.1 7.2 1.3 7.4 1.3 7.7 1.6 8.1 1.8 8.4 11.2 8.6 11.4 8.5 11.8 9. 1 9.2 11.2 8.5 CASA Deposits (LHS) CASA Ratio (RHS) Total CAR Tier I 5
Exhibit 15: Asset Quality Analysis 2Q FY17 3Q FY17 4Q FY17 1Q FY18 2Q FY18 QoQ % / bps YTD % / bps YoY % / bps Gross Non Performing Assets 298,621 324,27 337,119 372,863 382,858 2.7 13.6 28.2 Fresh Slippages 33,96 32,94 29,51 44,53 26,86 (39.7) (9.) (2.9) Net Non Performing Assets 169,479 182,456 188,321 27,85 194,794 (6.3) 3.4 14.9 GNP Ratio 1.7 11.7 11.2 12.6 12.4 (28) 118 162 NNP Ratio 6.4 7. 6.6 7.5 6.7 (77) 13 31 NPA Coverage Ratio 43.25 43.69 44.14 44.26 49.12 487 498 588 Restructured Gross Loans 56,36 55,23 56,96 38,57 52,7 36.6 (7.5) (6.5) Restr. Loan as % of Adv. 1.4 1.8 43 (18) (31) Exhibit 16: Slippages declined sequentially during the quarter under review Exhibit 17: Lower fresh slippages along with higher write-o helped the Bank to contain GNE growth 1 1. 8. 6. 4. 2.4 3.1 5.5 9.7 5.4 5.3 5. 4.5 6.2 3.9 6, 45, 3, 15, 8.5 9.9 19. 3.7 12.9 9.5 8.5 4. 1.6 2.7 36. 27. 18. 9... Incremental Gross NPA (LHS) Gross NPA Gr. qoq (RHS) Exhibit 18: PCR improved due to relatively higher provisioning during the quarter Exhibit 19: Lower GNP formation and higher provisioning expenses led to moderation in net NPA formation 5 48 46 44 42 46. 46.4 44.2 4 4 43.2 43.7 44.1 44.3 49.1 25, 2, 15, 1, 5, 3.1 3.4 4.1 5.2 6.2 6.4 7. 6.6 7.5 6.7 8. 6. 4.. 4 38 Net NPA (LHS) Net NPA Ratio (RHS) 6
Profit & Loss Statement (Y/E March, Rs mn) E FY19E Interest Earned 321,988 326,6 332,647 37,579 Interest Expenditure 238,857 237,566 235,463 255,68 Net Interest Income 83,131 89,33 97,184 114,971 Fee Income 4,98 4,687 6,826 8,614 Non Fee Income 32,22 44,959 41,339 46,983 Other Income 36,317 49,646 48,166 55,597 Net Operating Income 119,448 138,679 145,35 17,568 Core Operating Income 87,229 93,721 14,11 123,585 Employee Expenses 36,993 34,342 37,776 43,65 Other Expenses 26,29 3,36 31,613 34,775 Operating Expenses 63,22 64,378 69,39 77,84 Operating Profit 56,426 74,31 75,96 92,729 Provisions and Contingencies 38,772 7,786 85,19 74,935 Profit Before Tax 17,654 3,515 (9,148) 17,794 Taxes 4,138 (2,38) (91) 5,783 Profit After Tax 13,516 5,552 (9,57) 12,11 Balance Sheet (Y/E March, Rs mn) E FY19E Capital & Liabilities Capital 6,874 6,874 7,264 7,264 Reserves Total 222,38 227,478 222,673 231,75 Net Worth 228,912 234,352 229,937 238,97 Deposits 3,427,2 3,783,916 4,15,549 4,557,159 Current deposits 297,431 262,363 338,78 364,573 Saving deposits 811,326 1,4,724 1,98,234 1,253,219 Term Deposits 2,318,442 2,48,829 2,668,67 2,939,368 Borrowings 39,574 412,259 67,759 728,359 Other Liabilities & Provisions 81,273 91,18 83,516 87,291 Total Liabilities 4,46,959 4,527,44 5,26,761 5,611,778 Assets Cash & Cash Equivalents 292,762 328,225 364,983 47,526 Investments 892,83 1,121,49 1,228,427 1,345,751 Advances 2,673,54 2,864,666 3,194,12 3,593,365 Fixed Assets 39,399 38,944 4,339 41,263 Other Assets 149,175 173,72 198,99 223,872 Total Assets 4,46,959 4,527,44 5,26,761 5,611,778 7
Per Share Data and Valuation Y/E March FY16 FY17E FY18E FY19E No. of Shares (mn) 687.4 687.4 726.4 726.4 Earnings Per Share (Rs) 19.7 8.1 (12.5) 16.5 Book Value / Share (Rs) 295.4 35.2 283.8 297.7 ABV/Share (Rs) 193.4 168.2 149.7 163.6 Dividend Per Share (Rs) 8.3 8.4-2.2 Price/ Earnings (x) 8.4 2.6 (13.3) 1. Price/ BV (x).6.5.6.6 Price/Adjusted BV (x).9 1. 1.1 1. Key Assumptions Loan Growth 4.6 7.1 11.5 12.5 Deposit Growth 8.2 1.4 8.5 11. RWA Growth 8.1 6.4 1 1 Slippages Ratio 5.1 5. 3.8 Cost of Fund 6.2 5.7 5. 4.9 Yield on Fund 8.9 8.3 7.6 7.6 NIM 2.3 2.3 2.2 2.3 Other Income Growth 3.1 36.7 (3.) 15.4 Cost to Income Ratio 52.8 46.4 47.7 45.6 Average Credit Cost 1.5 2.6 3. 2.3 Eective Tax Rate 23.4 (58.) 1. 32.5 Growth Rate Net interest Income (1.5) 7.1 9.2 18.3 Other Income 3.1 36.7 (3.) 15.4 Operating Profit (3.1) 31.7 2.2 2 Provisions Expense 27.5 82.6 2.2 (1) PAT (24.1) (58.9) (263.1) (232.6) Risk Weighted Assets 8.1 6.4 1 1 Yields / Margins Cost of Funds (CoF) 6.2 5.7 5. 4.9 Yield on Advance 9. 8.3 7.4 7.5 Yield on funds 8.9 8.3 7.6 7.6 Net Interest Margin (NIM) 2.3 2.3 2.2 2.3 Balance Sheet Ratio Credit / Deposit Ratio 78. 75.7 77.8 78.9 Incremental C/D Ratio 45.3 53.6 12.4 88.4 Investment-Deposit Ratio 26. 29.6 29.9 29.5 CASA Ratio 32.4 34.4 35. 35.5 8
Asset Quality Gross NPA/Gross Advances 9. 11.8 12.3 9.3 Net NPA/Net Advances 5.2 6.6 5.8 4.2 Provisioning Burden as % of PPP 68.7 95.3 11 8.8 Provisioning Coverage Ratio 4 44.1 53.1 55.1 Slippage ratio 5.1 5. 3.8 Provis. Exp. to Avg. Advance 1.5 2.6 2.8 2.2 RoA Tree Analysis NII / Avg. Assets 2.2 Core Fee / Avg. Assets.1.1.1.2 Core Rev. / Avg. Assets 2.2 2.2 2.2 2.3 Ope. Exp. / Avg. Assets 1.6 1.5 1.5 1.5 Cost to Income 52.8 46.4 47.7 45.6 Emp. cost / Avg. Assets.9.8.8.8 Oprt. Exp. / Avg. Assets.7.7.7.7 Core OP/ Avg. Assets.6.7.7.9 Trading & Ot/ Avg. Assets.8 1..9.9 OP/ Avg. Assets 1.4 1.7 1.6 1.7 Provisions / Avg. Assets 1. 1.7 1.8 1.4 NPA prov. / Avg. Assets 1.2 1.4 1.6 1.2 PBT / Avg. Assets.4.1 (.2).3 Tax / Avg. Assets.1 (.) (.).1 Eective Tax Rate 23.4 (58.) 1. 32.5 RoA.3.1 (.2).2 Leverage (x) 17.7 19.3 21.9 23.5 RoE 5.9 2.4 (3.9) 5. Capital Adequacy Ratio Total CAR 1.6 11.8 1.1 9.1 Tier 1 8.1 9. 7.7 6.9 9
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