Recommendation: Buy
CMP = Rs 162 (as of Monday)
CMP = Rs 162 (as of Monday)
Price target: Rs 230
Result highlights:
- Union Bank of India's (UBI) net profit increased by 41.9% year on year (yoy) to Rs 275.5 crore in Q2FY2008. The growth was mainly driven by a 77.4% year-on-year (y-o-y) increase in the non-interest income category, as the net interest income (NII) growth at 7.2% yoy was weak. Lower operating expenses, which grew by 6.2% yoy, also helped to improve the earnings growth at to 41.9%.
- During the quarter, the bank's NII increased by 7.2% yoy but declined by 12.8% on a sequential basis. The net interest margin (NIM) of the bank was down by 20 basis points yoy and by 55 basis points sequentially at 2.56%. The sequential decline in the NIM was mainly due to the 61-basis-point increase in the cost of funds. The substantial sequential jump in the bank's cost of funds was mainly due to a higher cost of deposits arising from a decline in the low-cost deposit base and a rise in the high-cost term deposit base.
- The positive takeaway for the quarter has been the growth in the non-interest income but that too was driven by higher treasury income and recoveries as the core fee income grew by a moderate 11.3%.
- The operating expenses grew by a moderate 6.2% yoy that helped the bank in reporting a better operating profit growth of 35.8% yoy and 0.6% qoq. The core operating profit growth was however much lower at 18.4% yoy and declined by 11.2% sequentially.
- The provisions and contingencies dropped 36.9% on a sequential basis mainly due to the absence of investment depreciation on IFCI bonds and a Rs35-crore write-back in excess non-performing asset (NPA) provisions during the current quarter. However, the provisions are up by 18.1% yoy, in line with the business growth. The asset quality has improved on a sequential basis with the net non-performing asset (NNPA) at 0.65% as in September 2007 compared with 0.78% in September 2006.
- Currently, the low credit growth seems to be the main concern as the NIM is likely to stabilise as banks have already started to cut deposit rates. UBI has been one of the better performing public sector banks with a 23.6% compounded annual growth rate (CAGR) in earnings for the period FY2007-09E and a high return on equity of 21.5%.
- At the current market price of Rs162, the stock is quoting at 6.3x its FY2009E earnings per share (EPS), 3.3x pre-provision profit (PPP) and 1.3x book value (BV).
- I maintain Buy recommendation on the stock with a revised 12-month price target of Rs 230.
