27 Aug 2008 ... Union Bank of India. Bank to Bank Upon. Banking ... SWOT Analysis . .... comes
at Rs. 138. So we initiate coverage on Union Bank of India with.
Initiating Coverage Banking
India Research
Union Bank of India
Bank to Bank Upon
Sanju Verma Executive Director & Head - Institutional Business
[email protected] 91-22-6661 1859 Amey Sathe
[email protected] 91-22-6661 1872
HDFC Securities Limited, Trade World, C. Wing, 1st Floor, Kamala Mills Compound, Senapati Bapat Marg, Lower Parel, Mumbai 400 013 Phone: (022) 66611700 Fax: (022) 2496 5066
August 27, 2008
Union Bank of India
Table of Contents Page No. Investment Argument ........................................................................................................................................................................ 3 SWOT Analysis ................................................................................................................................................................................. 4 Ratio Analysis ................................................................................................................................................................................... 5 Dupont Analysis ................................................................................................................................................................................ 6 Key Assumptions .............................................................................................................................................................................. 6 Sensitivity Analysis ........................................................................................................................................................................... 6 Peer Comparison ............................................................................................................................................................................. 7 Industry Analysis ............................................................................................................................................................................... 8 Business Analysis .......................................................................................................................................................................... 25 Analysis of Q1FY09 ........................................................................................................................................................................ 26 Key Risks ........................................................................................................................................................................................ 26 Financial Statements ...................................................................................................................................................................... 27
August 27, 2008
Page 2
Union Bank of India
BUY
Investment Argument Excellent loan book growth: UBI has achieved a loan growth at a CAGR of 26% for FY04-08. It is expected to grow its loan book at a CAGR of 22% for FY08-10E. Taking into consideration the current difficult environment, we believe this loan growth is sound
CMP Target
Rs. 134 Rs. 179
Stock Return
36.8%
Capital Appreciation
33.8%
Dividend Yield
3.0%
and achievable. Healthy asset quality: UBI has healthy asset quality with 2.18% Gross NPAs and superior coverage ratio of 92.3% in FY08. Going forward in a difficult operating environment asset quality holds the key to the bank’s performance. Healthy asset quality and superior coverage ratio gives very good cushion against the high interest rate environment where normally higher slippages occur. Good operating efficiency: UBI has been able to improve its operating efficiency by
4337
adopting an excellent technology platform and containing the employee cost. Although
14482
we believe the ratio to be on the higher side on account of its expansion plans, excellent
Nifty Sensex
operating efficiency puts the bank in a different league. Fee-based income to grow: UBI has grown its fee-based income business at a
Key Stock Data
CAGR of 22.2% for FY03-08. We expect the bank to grow its fee income by more than
Sector
Banking
30% because of its increased focus on bancassurance, income from foreign exchange
Reuters Code
UNBK.BO
BLOOMBERG Code
UNBK.IN
No. of Shares (mn)
505.1
Superior ROAE and ROAA: UBI has enjoyed superior Return on Average Equity (ROAE)
Market Cap (Rs bn)
67.68
Market Cap ($ Mn)
153.6
and Return on Average Assets (ROAA). We expect the bank to achieve higher ROAE
Avg. 6m Vol.(‘000)
1071
transactions, mutual funds and foray into wealth management .
and ROAA due to higher profitability, higher leverage ratio and improved efficiency.
Valuation Stock Performance (%)
We have valued the bank on the basis Price to Adjusted Book Value (ABV) multiple
52 - Week high / low Rs.250/96
with 100% coverage ratio. We expect the bank to achieve average ROE of 22.5% in
1M
3M
6M
Absolute (%)
4.4
-5.0
-27.8
Relative (%)
3.8
6.1
-10.1
FY09E-10E. The Cost of Equity is calculated at 15.9% while we have assumed long term growth rate of 6%. Hence, on the basis of Gordon Growth model, the fair book value multiple works out to 1.71x for UBI. Higher fair book value can be partly attributed to lower Tier I capital i.e. higher leverage ratio. We also have to consider the constraints
Shareholding Pattern
(%)
Govt. of India
55.43
FIs & Local MFs
11.35
FIIs
18.65
Public & Others
14.57
under which the public sector banks have to operate. Historically, in the past 5 years, the bank has traded at a multiple of 1.3x adjusted book value. By taking into account these 3 factors, we value the bank at the multiple of 1.3x ABV. ABV with 100% coverage ratio in FY10 comes at Rs. 138. So we initiate coverage on Union Bank of India with
Source : Company
“Buy” recommendation, with a target price of Rs. 179.
Sensex and Stock Movement
Net Interest Income Net Profit NIM (%) EPS (Rs.) EPS Growth (%) ROAA (%) ROE (%) P/E (x) PABV (x) Gross NPAs (%) Net NPAs (%)
Year ending March 31st
NIFTY
210%
UBI
180% 150% 120% 90%
August 27, 2008
Aug-08
Apr-08
Dec-07
Aug-07
Apr-07
Dec-06
Aug-06
60%
FY06
FY07
FY08
FY09E
FY10E
23,743 6,752 3.06 13.37 (14.47) 0.84 16.50 10.10 2.09 3.84 1.56
27,902 8,454 3.02 16.74 25.21 0.88 17.86 8.07 1.65 2.94 0.96
30,864 13,870 2.84 27.46 64.07 1.22 24.67 4.92 1.24 2.18 0.17
33,131 13,643 2.77 27.01 (1.64) 0.98 20.11 5.00 1.02 2.00 0.10
39,273 16,396 2.72 32.46 20.19 0.96 23.23 4.16 0.98 2.00 0.10
Page 3
Union Bank of India
Swot Analysis Strengths
S
•
Has been able to maintain healthy asset quality. In Q1 FY09, Gross NPAs were 2.08% and Net NPAs were 0.15% with healthy coverage ratio of 93.05%. UBI will continue to operate with Gross NPAs of 2.00% with delinquency ratio below 1.00%.
W
•
Very good cost to income ratio of 38% in FY08 as the bank has managed to bring down and contain its costs significantly. Has one of the best operating efficiencies in the banking sector space.
O
•
the bank.
•
T A
Superior ROE (24.67% inFY08) and excellent ROAA (1.22%) reflect high profitability of
UBI has an excellent technological platform with 100% core banking solution rollout and increased use of electronic mode in transactions (12% of the total transactions). This helps the bank reduce risk, improve efficiency and reduce costs significantly.
Weaknesses
•
Higher interest rates are putting pressure on NIM, as the bank is facing difficulty in passing on increasing cost of funds to its customers.
N
•
The bank has large exposure in AFS category in its investment portfolio. In Q1, FY09, AFS consisted of 32.59% of the total investment portfolio. Out of this, 55% (Rs.63 bn) is in bond portfolio. Hardening of yields will require the bank to make provisions for mark-tomarket (MTM) losses on its bond portfolio.
A
•
L
Opportunities
finance advances growth.
•
Y
CD ratio has reached 73.1% in FY08. It means the bank has to rely on bulk deposits to
UBI still has a scope for improving its CASA, which is currently at 34.76%. The bank has planned to achieve a CASA target of 40% by 2012.
•
Increasing share of fee-based income in operating income represents very good opportunity for the bank. The bank is expecting its fee-based income to grow in excess of a CAGR of 30%.
S
•
I
Threats
presence in 10 countries with stress on Australia, Canada, Abu Dhabi and United Kingdom
•
S
Opening of 400 new branches and expansion in the international market by increasing its
Rising interest rates coupled with slowdown in the economy could result in higher delinquencies.
•
Increasing money supply and inflationary pressures may prompt RBI to continue monetary tightening at least in the short-term.
August 27, 2008
Page 4
Union Bank of India
Ratio Analysis Year to 31st March
FY06
FY07
FY08
FY09E
FY10E
Basic Ratio (Rs.) EPS Book Value per share 75% Adjusted Book Value 100% Adjusted Book Value Dividend per Share
13.37 81.02 74.89 64.51 3.50
16.74 93.71 91.08 81.81 2.00
27.46 111.33 117.00 108.80 4.00
27.01 134.30 139.93 132.14 3.50
32.46 139.75 147.05 137.92 3.50
11.17 6.45 4.72
11.43 6.87 4.56
11.89 6.98 4.91
11.54 7.01 4.53
11.00 6.57 4.44
Asset Quality (%) Gross NPAs Net NPAs NPA Coverage Delinquency Ratio
3.84 1.56 60.25 1.38
2.94 0.96 67.91 1.18
2.18 0.17 92.30 1.00
2.00 0.10 0.10 1.00
2.00 0.10 0.10 1.00
Profitability Ratios (%) ROAE ROAA NIM Operating Cost to Income Fee-based Income to Total Income Fee-based Income to Operating Income Other Income to Total Income Other Income to Operating Income Employee Cost to Operating Expenses Employee Cost to Operating Income
18.67 0.84 3.06 48.89 5.96 13.21 7.78 17.24 61.81 30.21
19.16 0.88 3.02 42.45 6.63 15.40 8.51 19.75 59.20 25.13
26.79 1.22 2.84 38.17 6.47 16.34 10.32 26.05 53.06 20.25
21.99 0.98 2.77 41.50 6.23 18.26 9.58 28.09 46.86 19.45
23.69 0.96 2.72 41.00 6.41 18.83 9.70 28.50 41.77 17.13
8.04 7.56 4.64 4.76 3.09 0.64 1.91 0.88
8.76 8.00 5.07 5.29 3.06 0.75 2.19 0.93
9.85 8.70 6.09 6.20 2.86 1.01 2.39 1.29
10.75 9.25 7.00 7.07 2.51 0.98 2.04 1.03
10.60 8.97 6.77 6.82 2.41 0.96 1.99 1.01
Other Ratios(%) Credit / Deposit Incremental Credit / Deposit Investment / Deposit
73.7 110.4 35.0
74.7 81.3 32.9
73.1 65.4 32.6
71.0 62.8 31.1
69.3 62.5 30.3
Valuation ratios (x) P/E P / BV P / ABV (75% coverage ratio) P / ABV (100% coverage ratio)
10.10 1.67 1.80 2.09
8.07 1.44 1.48 1.65
4.92 1.21 1.15 1.24
5.00 1.01 0.96 1.02
4.16 0.97 0.92 0.98
Capital Adequacy Ratio (%)* CAR Out of which Tier I Tier II * as per Basel II; calculated
Spread Analysis (%) Yield on Advances Yield on Interest-Earning Assets Cost of Deposits Cost of Funds Net Interest Income to AWF Non Interest Income to AWF Operating Profit to AWF Net Profit to AWF
August 27, 2008
Page 5
Union Bank of India
Dupont – ROE Analysis % of Average Assets
FY06
FY07
FY08
FY09E
FY10E
Interest Income Interest Expense Net Interest Income Fee Income Treasury and Other Income Operating Income Staff Cost Other Operating Expenses Operating Costs Pre-provision Operating Profit Loan Loss provisions Other Provisions and Exceptionals Total Provisions Profit before Taxes Taxes PAT (ROA) Average Assets / Average Net Worth ROAE
7.26 4.32 2.94 0.47 0.14 3.55 1.07 0.66 1.74 1.82 0.19 0.52 0.71 1.11 0.27 0.84 22.34 18.67
7.70 4.79 2.91 0.56 0.16 3.63 0.91 0.63 1.54 2.09 0.34 0.30 0.65 1.44 0.56 0.88 21.73 19.16
8.33 5.61 2.72 0.60 0.36 3.68 0.75 0.66 1.41 2.28 0.52 0.12 0.64 1.64 0.42 1.22 21.89 26.79
8.82 6.43 2.39 0.61 0.33 3.01 0.65 0.73 1.38 1.95 0.50 0.04 0.54 1.41 0.42 0.98 22.33 21.99
8.55 6.25 2.30 0.61 0.31 2.92 0.55 0.77 1.32 1.90 0.49 0.03 0.53 1.37 0.41 0.96 24.62 23.69
Key Assumptions Key Assumptions (%)
FY06
FY07
FY08
FY09E
FY10E
Advances Growth Deposits Growth Yield on Advances Cost of Deposits Operating Cost to Income Ratio Gross NPAs Provisions / Gross Advances
33.10 19.83 8.04 4.64 48.89 3.84 0.47
16.87 14.96 8.76 5.07 42.45 2.94 0.73
19.17 21.93 9.85 6.09 38.17 2.18 0.88
21.50 25.00 10.75 7.00 41.50 2.00 0.75
22.00 25.00 10.60 6.77 41.00 2.00 0.75
Sensitivity Analysis We have carried out sensitivity analysis of the earnings, return on average assets (ROAA), and return on average equity (ROAE), to the changes in NIM. The effect of 10 and 25 bps changes on Net Profit, EPS, ROAA and ROAE is summarized below. Base Case FY09E FY10E NIM (%) Net Profit (Rs. bn) EPS (Rs.) ROAA(%) ROAE(%)
2.77 13.64 27.01 0.98 21.99
2.72 16.40 32.46 0.96 23.69
Base Case FY09E FY10E NIM (%) Net Profit (Rs. bn) EPS (Rs.) ROAA(%) ROAE(%)
August 27, 2008
2.77 13.64 27.01 0.98 21.99
2.72 16.40 32.46 0.96 23.69
NIM up by 10 bps FY09E FY10E 2.87 14.84 29.38 1.07 23.92
2.82 17.84 35.32 1.05 25.78
NIM down by 10 bps FY09E FY10E 2.67 12.45 24.64 0.90 20.06
2.62 14.95 29.60 0.88 21.60
NIM up by 25 bps FY09E FY10E 3.02 16.63 32.93 1.20 26.81
2.97 20.01 39.62 1.17 28.91
NIM down by 25 bps FY09E FY10E 2.52 10.65 21.09 0.77 17.17
2.47 12.78 25.30 0.75 18.47
NIM up by 50 bps FY09E FY10E 3.27 19.62 38.84 1.42 31.63
3.22 23.63 46.77 1.39 34.14
NIM down by 50 bps FY09E FY10E 2.27 7.66 15.17 0.55 12.36
2.22 9.17 18.15 0.54 13.24
Page 6
Union Bank of India Comparison with similar sized banks i.e. Central Bank of India and Syndicate Bank as of June 30, 2008 Comparison chart Network
Branch Presence Business size
CASA Lending Focus
NIM
Fee Income Cost to Income Ratio Asset Quality
ROAA (annualized) ROE (annualized) Capital Adequacy Ratio
Other forays
Union Bank of India 2,373 branches, 118 extension counters, 35 service branches and ATM network of 1,273 with a customer base of over 20 million Predominantly in western & northern region Total Business size of Rs.1,831 bn consisted of gross advances of Rs.758 bn and deposits base of Rs.1,073 bn Has been able to improve it to 34.8% Focuses on Agriculture (14% total loan portfolio), SME (17%) and Retail (11%) segment 2.63% on account of higher cost of funds; Has come under pressure in last 6 quarters 18.6% of operating income Decent at 40.29%; One of the lowest in Public sector banks space Excellent asset quality with GNPAs at 2.08%, NNPAs at 0.15% and coverage ratio of 93.05%
0.74%; Consistently in the range of 0.85 to 1.00% Decent at 15.62%; Has been able to maintain it above current level As per Basel II, CAR stood at 11.28% with Tier I ratio of 6.93% and Tier II ratio of 4.35% Has formed JV in life insurance, asset management and wealth management business
Central Bank of India 3,356 branches and 237 extension counters with over 25 million account holders
Syndicate Bank 2,181 branches and ATM network of 1,039 with over 21 million customer base
Predominantly in central & eastern region Total Business size of Rs.1,888 bn consisted of gross advances of Rs.736 bn and deposits base of Rs.1,152 bn
Predominantly in southern region
At 34.0%; Was down from 42.09% in FY07 Focuses on corporate and commercial customers with more than 70% of total loan portfolio Poor NIM at 1.74% due significant increase in interest expenses; NIM came down from 3.28% in FY07 ~11.0% of operating income Deteriorated significantly to 65.27.% GNPAs at 3.03% and NNPAs at 1.36%; Considerable improvement from FY07 when GNPAs were 4.81% and NNPAs were 1.70% 0.19%; Worsened from 0.62% in FY07 Disappointing at 5.96% on account of lower net profits As per Basel I, CAR stood at 10.01%
Absence of any independent JVs. Only distributes insurance & mutual funds products
Total Business size of Rs.1,557 bn consisted of gross advances of Rs.640 bn and deposits base of Rs.917 bn Very low CASA of 30.1% Focus is on corporate, housing and retail lending with more than 75% of total loan portfolio Reported NIM at 1.91%; Margins had contracted in 4-5 quarters ~12.0% of operating income Has been on higher side at 54.40% GNPAs at 2.84%, NNPAs at 1.03% and coverage ratio of 62.19%. Has seen some deterioration in asset quality from FY07 when GNPAs were at 2.95% and NNPAs were at 0.76% Very low at 0.33% due to heavy MTM losses provisions Low at 8.89% due to poor profitability As per Basel II, CAR stood at 12.11% with Tier I ratio of 7.21% and Tier II ratio of 4.90% Distributes insurance products
Conclusion Union Bank of India (UBI) clearly scores over its peers i.e. Central Bank of India and Syndicate Bank on various parameters. UBI has improved its asset quality tremendously with an excellent coverage ratio of 93.05%. Healthy asset quality and good coverage ratio reflect prudent lending practices that are key in rising interest scenario when NPAs and delinquencies tend to rise. On the operating efficiency front, UBI is much better placed than its peers with cost to income ratio of 40.29%. The bank has been able to contain its employee cost and other operating expenses with various initiatives such as ‘Project NavNirman’ and 100% rollout of core banking solution. Comparatively better investment portfolio management has also helped UBI report lower MTM losses as compared to Central Bank of India and Syndicate Bank. UBI also reports very high ROE because of comparatively higher leverage it enjoys with Tier I ratio of 6.93%. Consistently higher ROAA and ROE reflect higher profitability. We believe, going forward, due to the monetary tightening, the banking sector will experience loan growth slowdown and high cost of funds. UBI will still be one of the best bets in the public sector banking space because of its healthy asset quality, superior operating efficiency and higher profitability. August 27, 2008
Page 7
Union Bank of India
Industry Analysis Macro factors need to be watched; Oil has been the biggest joker in the pack!!! Although the banking sector has great potential, currently, macro factors are determining the direction of this sector. For the last 6 months, economy has been grappling with major headwinds such as higher oil prices, even higher inflation and northwards moving interest rates. Undoubtedly, oil has been the biggest joker in the pack. All commodity prices have corrected significantly except for oil. Recently, we have seen softening of oil prices, which is indeed a positive sign. We believe oil cannot sustain at the levels of $140-150/bbl. If the US economy is said to be in recession, then we cannot have oil hovering at $150 mark as US consumes a massive 25% of the total world energy requirement. Although oil may see temporary spike to $120-125 on account of Georgia-Russia conflict, by December 08 we believe oil will settle around sub $100/bbl. Although oil may see a temporary spike to $120-125 on account of Georgia - Russia conflict, by December 08 we believe oil will settle around sub$100/bbl. In fact OPEC has lowered its forecast for oil demand growth for CY08 to 1.17% from 1.20% set earlier. Similarly in CY09, forecast for oil demand growth has been set at 1.03%. Added to this, Iraq has also started pumping 2.4mn barrels per day, the highest since America's invasion of that country in 2003. Chart 1: Indexed Price Chart for BANKEX and Oil in last 12 months 220% 180% 140% 100%
Oil Prices
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Dec-07
Nov-07
Oct-07
Sep-07
Aug-07
60%
NIFTY Bank Index
Source: Bloomberg
Northward bound oil prices proved to be the nemesis of many markets, including India’s, this year. We believe oil will once again prove to be the biggest reason why markets should react later this year. This time however, it will be southward bound oil prices that should spread good cheer. The question is no longer whether oil will go down or not; it is whether it will go to sub $100/bbl by December this year or not. Our call is, it will...
August 27, 2008
Page 8
Union Bank of India
Chart 2: Impact of oil on selected world GDP growth rates
YoY US* 1.80% Germany 1.70% UK 1.60% Japan 1.00% Eurozone 15 1.50% Eurozone 27 1.70% * US QoQ data is annualized. Eurozone 15 = Data for 15 countries in Eurozone Eurozone 27 = Data for 27 countries in Eurozone
GDP Growth Rates Jun-2008 Mar-2008 QoQ YoY QoQ 1.90% 2.50% 0.90% -0.50% 2.60% 1.30% 0.20% 2.30% 0.30% -0.60% 1.20% 0.80% -0.20% 2.10% 0.70% -0.10% 2.30% 0.70%
Inflation is heating up: The rate of inflation in India has galloped to a 13-year high to 12.63% for the week ended August 09, 2008. In the latter part of June 08, inflation accelerated to a 13- year high after record crude oil costs forced the government to raise retail fuel prices. Government raised petrol prices by 11% to Rs. 50.56 a liter on June 4. Diesel costs were increased by 9% and cooking gas by 17%. It previously raised energy prices in February 2008. Reserve Bank of India data showed that the last time inflation was in double digits was in April-May 1995, when it ruled above 11%. Chart 3: M3 growth v/s Interest rates 22.5%
9.2%
21.8%
8.8%
21.1%
8.4%
20.4%
8.0%
19.7%
7.6% 7.2%
19.0% Aug-07
Oct-07
Dec-07 M3 Growth
Feb-08
Apr-08
Jun-08
Aug-08
Repo rate
Source: RBI
Double-digit inflation was also on account of higher commodity prices, which were at record highs. Now, with commodity prices correcting substantially and oil cooling off significantly, we expect inflation to come down and stabilize around 8-10% mark by the year-end. But before cooling down, inflation may touch 13.5% on account of the base effect and to factor-in the complete impact of fuel hike. Cooling down of inflation is based on the assumption that monsoons would be good and there would be no further spike in oil prices. We also expect RBI’s aggressive monetary tightening to result in easing of inflationary pressures, by curtailing excess liquidity in the system, which in part is the result of RBI’s aggressive purchase of dollars and selling of rupees in Sept – Oct 2007 when rupee was threatening to appreciate beyond Rs. 39 to the dollar.
August 27, 2008
Page 9
Union Bank of India
Table Inflation and its impact Expectations in next 6 months Money Supply Growth
Has subsided below 20%. Expect RBI's monetary tightening to slow down money supply growth.
Exchange Rate Movement
We believe rupee will trade between the range of 41-44.5 per dollar.
Resultant Inflation
Key Swing Factors Currency with public is still growing at more than 15%, which is worrisome.
Neutral
It can strengthen beyond Rs. 41 if trend of FII outflows is reversed. However RBI may not allow it to go beyond Rs. 39 as it will make export target of $200 bn in 2008-09 difficult to acheive. It may not depreciate below Rs. 45 as that would make RBI's task of bringing inflation to single digit by March 09 difficult.
Commodity Prices
Prices have corrected but are yet to moderate to an extent that would help inflation to cool down. Since Jan-08,steel prices have increased by 40-50% to $850900/tonne, iron-ore 40-50% to $110-130/ tonne, coking coal 70-80% to ~$850/tonne, and cement by 3-4% to Rs 240/50kg bag.
World economy is slowing down. That should bring down commodity demand and consequently prices. If China decides to curb exports or impose export tax that may lead to artificial shortages, it will push prices higher. Already steel prices have corrected by 26% in the last one month to approximately $1160/ tonne in many parts of the globe
Food Prices
Procurement of 4.7mn tonne rice @ Rs.850/ quintal & 22.5mn tonne wheat @ Rs.1,000/ quintal during April-July this year.
Fickle monsoons resulting in poor rabi crop.
Monsoons
Rainfall to be in the range of 96% to 104% of the long period average which is good news for Indian agriculture.
Rains still deficit in parts of Maharashtra, Andhra Pradesh, Gujarat but playing catching up.
Fuel Prices
Not expecting further fuel rate hike as we are entering the election period. We also expect crude to settle down to sub $100/bbl levels
If light diesel oil (ytd price rise of 72%), bitumen (32%), furnace oil (51%) and ATF(61%) remain stable, then inflation can cool down. Escalation of geopolitical tensions in the Russian region needs to be watched, however, globally speaking.
Base Effect
Last October inflation was 3.1%. Impact of base effect to be lesser from Nov-Dec 08.
October may see a sharp spike due to particularly low base effect
Inflation
We expect inflation to come down to 8-10% level by end of 2008
All of the above.
August 27, 2008
Page 10
Union Bank of India
Proactive and hawkish RBI: Reserve Bank of India (RBI) has been proactive in its approach while dealing with inflation. Quite clearly RBI is heading towards ‘inflation targeted economy’ rather than ‘growth oriented economy’. It means it is ready to sacrifice some growth in the pursuit of cooling down inflation. As they say, growth benefits few but inflation pinches everyone. We believe the stance adopted by RBI, at least for the time being, minimizes long-term macro concerns. Table: Monetary policy actions on Repo / Reverse Repo rates & CRR since July 2007 Policy Action Date
Repo Rate
Reverse Repo Rate
CRR
July 31, 2007 April 17, 2008 April 29, 2008 June 11, 2008 June 25, 2008
Unchanged to 7.75% Unchanged Unchanged Hiked by 25 bps to 8.00% Hiked by 50 bps to 8.50%
Unchanged Unchanged Unchanged Unchanged Unchanged
Hiked by 50 Hiked by 50 Hiked by 25 Unchanged Hiked by 50
July 29, 2008
Hiked by 50 bps to 9.00%
Unchanged
Hiked by 25 bps to 9.00%
bps to 7.00% bps to 7.50% bps to 8.25% bps to 8.75%
Source: RBI
It is clearly evident that RBI has been aggressive in its monetary tightening policy stance. In fact in last 5 months, Repo rate has been increased by 125 bps and CRR by 150 bps. In spite of several CRR and Repo rate hikes, credit off-take still remains above the RBI’s comfort level.
High interest rates regime. More rate hikes to come… On July 29th, 2008, RBI surprised everyone with a rate hike of 50 bps in repo rate. We were expecting 25 bps repo rate hike. We believe RBI has given a clear signal with respect to bringing down inflation. So going by that signal, further rate hike is imminent. Inflation data for the last 3-4 weeks clearly shows that inflation is stabilizing. But in August last year, inflation index did not move much. So clearly in August this year, we can expect higher inflation numbers due to the base effect. If inflation continues upwards, which we think will be the case for a brief while, we can expect a further rate hike of 2550 bps . Chart 4: WPI v/s 10year G-Sec yield 13.00% 11.50% 10.00% 8.50% Real interest rates are still negative…
7.00% 5.50% 4.00%
10-year G-Sec yield
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Dec-07
Nov-07
Oct-07
Sep-07
Aug-07
Jul-07
2.50%
WPI Inflation
Source: RBI
August 27, 2008
Page 11
Union Bank of India
Negative real interest rates
Resulting in demand pull inflation
Disincentive to savings
Increase in public spending and higher demand
Prolonged negative real interest rates cannot be sustained for long. To make real interest rates positive, either inflation has to come down or rates have to go up. Based on this assumption, we think if inflation does not cool down then we are in for more rate hikes.
Inverted yield curve As interest rates harden, yield on 10-year G-Sec is moving northwards. This hardening of yield has been coupled with inverted yield curve, which means long-term rates are lower than short rates term rates. This also means one is asking for higher risk premium in short term as compared to the long term, as short term concerns are more. In India, inverted yield curve can also be because of the underdeveloped bond market or due to the absence of liquidity for other tenure bonds. Still, phenomenon of inverted yield curve cannot be ignored. Chart 5: Inverted Yield Curve 9.8%
Yield (%)
9.6% 9.4% 9.2% 9.0% 8.8% 8.6% 1
2
3
4
5
6 7 8 Maturity (in yrs.)
9
10
11
12
13
Source: Bloomberg
We do believe short-term risk will remain for some time as suggested by the yield curve. In developed countries, prolonged inverted yield curve suggests likelihood of recession. That rule may not apply to India, but one needs to watch its movement.
August 27, 2008
Page 12
Union Bank of India
Loan growth to temper down The high credit off-take has been causing concern to the central bank in the face of double-digit inflation and has been one of the important reasons for tightening monetary policy. High credit growth has been led by genuine industrial demand, but also by certain sectors such as credit cards (87% yoy) and NBFCs (62%yoy), where the central bank would like to see it slowing down. Credit to ‘petroleum, coal and nuclear fuel’ industry increased by Rs182.5 bn (63% yoy). Even if we strip off credit to petrol et al, we still have credit growth of 23% (24.1% yoy for total non-food credit). So, signals are mixed to substantiate any excessive credit growth claims. Still given the higher interest rate scenario, we expect loan growth to slow down. In such circumstances, we believe it is the private sector banks, which will face some negative impact. Some of the private sector banks are expected to grow in the region of 30%+ (e.g. Axis Bank is expected to grow at 42-45% which is way above RBI’s target loan growth rate). In the case of public sector banks, which are already cautious, there should not be any difficulty in achieving loan growth in the region of 20%, the level at which RBI would like to see credit off-take to settle down in the coming month.
No write-back of provisions on farm loans waived In February 2008, Finance minister P Chidambaram announced agriculture loan waivers to the tune of Rs 60,000 crore for debt trapped farmers. On July 30, RBI came with a circular on accounting guidelines for the treatment of loans that are covered under the agriculture debt relief scheme. Based on RBI guidelines, banks would need to hold a minimum provision of 10% on the 100% loan waiver scheme. Earlier in Q1FY09, most of the banks wrote back their provisions on NPAs, which were eligible for the waiver. Now all these banks need to reverse the same and may be required to provide additional provisions in Q2FY09. Punjab National Bank reported reversal of Rs.727 mn, Union Bank of India of Rs. 220 mn, while Indian Overseas Bank reversed Rs.128 mn. Exact impact of this will be difficult to compute as not all banks have provided data, but we believe the impact would not be material.
Banks to face pressure on margins We believe the impact of higher interest rates will be felt on banks’ margins, as they have to raise deposits at higher cost. This also depends on re-pricing capability of banks on their loan portfolio. Ultimately, it will be tough for banks to maintain their Net Interest Margins (NIM). In such a scenario, we believe Current A/c and Savings A/c (CASA) will be king. CASA is low cost deposits in nature. So banks with higher CASA should be able to weather the storm of high interest cost. Rising bond yield will also have a negative impact on banks’ bottomline. The immediate impact of higher yield can be seen on Mark-to-Market (MTM) losses of bond portfolio of banks in Available for Sale (AFS) and Held for Trading (HFT) categories. Therefore banks with lowest investment portfolio in AFS and HFT with lower duration will be the beneficiaries. Although MTM is not actual cash loss, and in lower interest scenario banks will have above normal profits on account of the reversal of these provisions, we believe banks with lower percentage in AFS & HFT category bring an element certainty to earnings. August 27, 2008
Page 13
Union Bank of India
Going forward, hardening of interest rates may result in higher level of NPAs as well as higher delinquency levels. We think the impact can be seen in the retail loans category, especially in the personal segment that is unsecured in nature. Banks with prudent lending history will be in a better position to tackle the problem of higher NPAs and slippages. In such difficult times, quality does matter… Chart 6: Historical NPAs and yield on 10-year bond
10-yr bond yield
Gross NPAs (%) - RHS
Mar-08
Aug-07
0.0% Jan-07
4.0% Jun-06
2.5%
Nov-05
5.5%
Mar-05
5.0%
Aug-04
7.0%
Jan-04
7.5%
Jun-03
8.5%
Nov-02
10.0%
Apr-02
10.0%
Net NPAs (%) - RHS
Source: RBI & Bloomberg
August 27, 2008
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Union Bank of India
Business Analysis Consistent business growth: UBI has shown consistent growth in its total business. Total business has grown by a CAGR of 20.3% from FY03-08. As of June 30, 2008, total business stood at Rs. 1,831 bn. The bank is expecting to hit total business in excess of Rs. 2,200 bn by end of FY09. Chart 1: Business growth 3,000
2,726
(Rs. in Bn)
2,500
2,203 1,797
2,000 1,488 1,500
500 0
1,298
1,287 1,039
1,029 1,000
810 506
1,623
741
852
618
304
411
FY04
FY05
904
546
637
759
FY06
FY07
FY08
Gross Advances
FY09E
1103
FY10E
Deposits
Growth can be attributed to the excellent distribution network that the bank has with 2,373 branches, 1,273 ATMs, 118 extension counters and 35 service branches; total distribution network of 3,799 channels. It has also a well-diversified network in rural, metro and urban areas with its stronghold in western and northern regions of the country. Project ‘Nav Nirman’: Project Nav Nirman was initiated in April 2006 with a view to transforming the bank to a customer centric marketing organization by leveraging technology, redefining business strategies and re-engineering the business processes. Under this project, UBI has successfully implemented 100% core banking solution rollout. Similarly Centralized Back Offices and Centralized Processing Cells have been established helping the bank to reduce operating costs and improve efficiency. It has also turned branch units into sales outlets to reach the projected business growth. In December 2007, the project stabilized. Although it is just 6-8 months into implementation, going forward we believe this will certainly help the bank to streamline its services with a superior operating efficiency and excellent quality. Expansion plans are on track: UBI has applied for licenses for 500 branches. Out of this, it is planning to open 400 branches in FY09. Although this will put some strain on its operating costs, the strengthening of distribution network will help the bank to gain more market share, which is currently at 4%. UBI is also looking to go international with a plan to open branches in 10 different countries including Australia, Canada, Abu Dhabi and United Kingdom. The rationale behind going international is to take the benefit of Indian corporates operating in overseas markets. This will also help the bank to garner NRI deposits.
August 27, 2008
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Union Bank of India
Excellent advances growth: UBI has given stellar loan growth at a CAGR of 23.8% for FY03-08. The bank has continued to focus on a four-pronged strategy for growth. Retail, Agribusiness, Medium, Small & Micro Enterprises (MSME) and trade finance will continue to be the four growth engines. In retail loan category, maximum exposure comes from education, housing and auto loans. Similarly in MSME category, thrust is more on Medium Enterprises. Focus on MSME can be clearly seen as that segment has grown by 34% in FY06-08. MSME segment should grow at 30% while we expect trade the finance business to grow in excess of 25%. Housing loan growth may come under pressure and the bank has slowed down other types of retail loans deliberately. We believe the strategy adopted by the bank, will help it to achieve projected loan growth of 22% as MSME and retail sectors are growing sectors of the economy. Chart 2: Loan Composition 1000 800
Rs. 759
Rs. 758
FY2008
Q1FY09
(Rs. in bn)
Rs. 637 600
Rs. 546
400 200 0 FY2006 Agriculture
Retail
FY2007 Trade Finance
MSME
Export Credit
Others
CASA may be difficult to grow: UBI has achieved a deposit growth at a CAGR of 18.3% in FY03-08 with increasing focus on Current Account Savings Account (CASA). CASA deposits are low cost deposits in nature. We expect UBI to achieve CASA of 35% in FY09 with long-term target of 40% by FY12. Growing CASA will be difficult in current situation; so we have assumed a modest CASA target. UBI has introduced 2 products i.e. Union Super Salary Account and Union Classic Current Account, as we expect most of the CASA growth to come from these 2 products. Even at 35% level, UBI is in a better position as compared to other banks especially in the public sector space.
August 27, 2008
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Union Bank of India
Chart 3: CASA Industry comparison as of June 30, 2008 34.8%
UBI SBI PNB Indian Overseas Bank Indian Bank ICICI Bank HDFC Bank Canara Bank Bank of India Bank of Baroda Axis Bank
41.9% 41.3% 30.6% 33.8% 27.6% 44.9% 34.2% 34.0% 36.9% 40.0%
00.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
Source : Company
NIMs are under pressure: UBI has been able to improve its yield on advances on account of increasing focus on MSME and trade finance segments, which are very productive and high yielding in nature. As per our estimate, UBI enjoys a yield of 10.210.3% on agricultural loans while housing loans give it a yield of around 11%. On the other hand MSME gives a yield of 12% while trade finance has a yield in excess of 12.5%. Chart 4: Spread analysis 12.0% 10.0% 8.0% 6.0% 4.0% FY04
FY05
FY06
Yield on Advances Cost of Deposits
FY07
FY08
FY09E
FY010E
Yield on Investments Cost of Funds
Source : Company, HDFC Sec. Research All the numbers are calculated
Even though yield on advances is rising, the cost of deposits have also shown considerable rise. In fact the bank has not been able to keep pace with the rise in cost of funds as compared to yield on funds. This has put pressure on Net Interest Margin (NIM), which has seen a downward trend. We believe declining NIMs can be attributed to the scenario where loans are getting disbursed at lower than its benchmark primelending rate (BPLR).
August 27, 2008
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Union Bank of India
Chart 5: Net Interest Margin 3.50% 3.32%
3.30%
3.30% 3.06%
3.10%
3.02% 2.84%
2.90%
2.77%
2.72%
2.70% 2.50% FY04
FY05
FY06
FY07
FY08
FY09E
FY10E
Source : Company, HDFC Sec. Research
Although UBI expects to maintain its NIM at 2.80% in FY09, we believe the bank will find it difficult to maintain NIM at 2.8% level considering the rising interest rate scenario. One plus point that UBI has is its loan re-pricing capability. Almost 70% loans are in the floating loan category that puts them in a better position to maintain yield on advances as interest rates head northwards. It has also increased its BPLR from 13.75% to 14.25% on all types of loans except pre-existing & future Education Loans, Housing Loans and Car Loans.
Healthy asset Quality UBI has done exceptionally well to contain Gross NPAs as well as Net NPAs. Gross NPAs have been brought down from 8.96% in FY03 to 2.18% in FY08. Net NPAs have also seen significant reduction as the bank has increased its loan loss coverage ratio significantly from 48.00% in FY03 to 92.30% in FY08. Bank’s coverage ratio is one of the best in the industry. Net NPAs were reduced to 0.17% in FY08 from 4.91% in FY03. Delinquencies have also come down from 2.56% in FY03 to 1.00% in FY08. The Bank has been able to reduce NPAs due to strict credit monitoring to avoid fresh delinquencies, up-gradation of newly slipped accounts, disposal of impaired assets, cash recoveries through credit recovery drives and enforcements under SARFAESI Act /DRT Act. Prudent lending and asset quality are key investment argument for the bank.
Chart 6: Asset Quality 10.0% 92% 7.5%
95%
100%
75%
64%
68% 48%
5.0%
95%
60%
50%
25%
2.5%
0%
0.0% FY04
FY05
Gross NPA (%)
FY06
FY07 Net NPA (%)
FY08
FY09E
FY10E
Coverage Ratio (RHS)
Source : Company, HDFC Sec. Research
August 27, 2008
Page 18
Union Bank of India
We expect UBI to contain GNPAs at 2.00% and maintain coverage ratio in the range of 90-95%. Excellent asset quality and sound coverage ratio gives us very good comfort in the high interest rate environment. Although threats of fresh delinquencies still remain in the current scenario, we believe UBI is in good shape to weather this storm. The bank is deliberately going slow on retail loan with a clear-cut preference for higher credit quality. Similarly, the bank is focusing more on medium sector enterprises than small enterprises. SMEs are more prone to delinquencies as compared to MEs in a rising interest rate regime. So we expect the bank to remain insulated to a great extent from higher GNPAs and fresh delinquencies. Investment Portfolio: In Q1FY09, total investment portfolio stood at Rs. 353.47 bn. Duration of Held Till Maturity (HTM) category was 4.09 years while Available for Sale (AFS) was at 2.72 years.
Investment portfolio bifurcation Held for Trading 0%
Available for sale (AFS) bifurcation Shares, CDs, Venture Funds etc. 45%
Available for Sale 33%
Held to Maturity 67%
Bond 55%
We expect the bank to record MTM of around of Rs.1.6 bn if yield moves by 100 bps considering only bond portfolio in AFS category, which is currently 55% of total AFS portfolio.
August 27, 2008
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Union Bank of India
Increasing focus on fee-based income, but still long way to go… Due to the changing nature of the Indian banking system, most banks have started to concentrate on fee income, which is complementary in nature to their activities. UBI is not an exception. The bank is generating fee-based income from various sources such as distribution of insurance products (both life & non-life), distribution of more than 20 asset management companies’ products, rent on SDV lockers, processing charges, inter-sol charges, account maintenance charges, etc, incomes from foreign exchange transactions like commission on bills, Letters of Credit, Guarantees, etc. Fee income has exhibited a CAGR of 22% while incomes from foreign exchange have shown a CAGR of 21% in FY03-08. Although fee-based income has shown considerable growth, its contribution to operating income (Net Interest Income + Other Income) still remains on the lower side. In FY03, fee-based income was 10.8% of the operating income that improved to 16.3% in FY08. We are expecting the bank to have a CAGR of 30%+ in its fee income for FY08-10E. This will increase the contribution of fee income to operating income to 19% by FY10. Chart 9: Other Income composition and growth Rs 8,000
(Rs. in mn)
Rs 6,000
Rs 4,000
Rs 2,000
Rs 0,000 FY03
FY04
FY05
Commission, Exchange & Brokerage
FY06
FY07
Treasury income
FY08 Other Income
High operating efficiency: UBI has been able to exhibit high level of operating efficiency. It has successfully brought down its operating cost to income ratio from 43.9% in FY03 to 38.2% in FY08. The bank has got one of the best cost to operating ratios in the banking sector. Operating cost was contained by heavy reliance on technology, efficient utilization of available resources and lower employee cost. In fact in FY08 employee cost de-grew by 3.3% over FY07. UBI is also insulated from AS-15 guidelines as it has made adequate provisions.
August 27, 2008
Page 20
Union Bank of India
Chart 10: Cost to Operating Income: Industry Comparison as of June 30, 2008 Bank of India Corporation Bank UBI Axis Bank Indian Bank SBI Bank of Baroda PNB Canara Bank Bank of Maharashtra Indian Overseas Bank
38.6% 40.1% 40.3% 44.1% 44.2% 45.1% 45.2% 48.3% 49.3% 63.5% 65.3% 0%
10%
20%
30%
40%
50%
60%
70%
80%
Source : Company
We expect the bank to see increase in its employee cost by 5-6% in FY09 on account of the massive expansion plans where it is opening 400 branches. We are projecting cost to income ratio at 41.5% in FY09 and 41% in FY10. Higher operating costs are on account of various JVs set to kick-off and international plans in coming 2 years.
Rs. 15,000
(Rs. in mn)
Rs. 12,000
60.0% 42.2%
44.4%
48.9% 41.5%
42.5%
Rs. 9,000
38.2%
48.0% 41.0% 36.0%
Rs. 6,000
24.0%
Rs. 3,000
12.0%
Rs. 0,000
0.0% FY04
FY05
FY06
FY07
Employee Cost
FY08
FY09E FY10E
Other Operating Cost
Cost to Income Ratio (%) (RHS)
Superior ROAE reflects higher profitability for shareholders: UBI has enjoyed superior ROE. ROE dipped below 20% in FY05 and FY06 due to follow-on offering. We expect UBI to enjoy ROE in excess of 20% in FY09-10. Higher level of ROE can be attributed to lower Tier I ratio i.e. higher leverage enjoyed by the bank. ROAA also has been excellent, reflecting higher profitability and effective use of resources. We believe ROAA will settle down at the level of 0.90% in coming 2 years.
August 27, 2008
Page 21
Union Bank of India
Chart 11: ROAE and ROAA 35%
1.40%
30%
1.12%
25%
0.84%
20%
0.56%
15%
0.28% 0.00%
10% FY04
FY05
FY06
FY07
ROAE (%) LHS
FY08
FY09E
FY10E
ROAA (%) RHS
Source : Company, HDFC Sec. Research
Capital raising plans: As per Basel II, in Q1, FY09, Capital Adequacy Ratio (CAR) stood at 11.28%, out of which Tier I ratio was at 6.93%. Although we believe the bank is in a comfortable position currently, going forward, it may need to augment its capital base in order to support growth. We think UBI has 3 options at its disposal for its capital raising plans:
•
Rights issue: UBI can come up with a rights issue. For this, it needs equity market conditions to improve considerably to get the right valuation.
•
Foreign loans: UBI can also pursue foreign loans, but we believe this is a remote option.
•
Perpetual bonds: The bank still has headroom for raising Rs. 400 crore in perpetual bonds in Tier I capital.
We expect UBI to come up with a rights issue most likely in the last quarter of FY09.
Chart 12: CAR industry comparison as of June 30, 2008 8.2% 6.9% 9.3% 8.9% 7.6% 10.6% 11.3% 9.3% 8.1% 7.9% 9.9%
Yes Bank UBI* SBI PNB* Indian Overseas Bank Indian Bank ICICI Bank* HDFC Bank Bank of India Bank of Baroda Axis Bank 0%
4%
6.8% 4.4% 3.7% 4.1% 3.8% 1.3% 2.1% 2.9% 4.3% 5.3% 3.3% 8%
Tier I
12%
16%
Tier II
*Basel II Source : Company
August 27, 2008
Page 22
Union Bank of India
Other Initiatives Insurance JV: On 6th December 2007, UBI signed a joint venture agreement with Bank of India and Dai-Ichi Insurance of Japan. This joint venture will provide life insurance products to the Indian market and is expected to boost the bank’s other income. The first product is expected to come in December 08. Asset Management: In July 08, it formalized the joint venture with KBC Asset Management NV, Belgium for setting up an Asset Management Company. The Bank will hold the majority stake of 51% in the venture. Wealth management: The Bank has signed an agreement with Wealth Advisors (India) Private Ltd to tap the high net-worth individuals for wealth management services. The bank aims to enroll 500-600 customers by March next. It has already enlisted 100 of the total 25,000 HNI customers it currently has.
International Operations Currently, UBI has one overseas branch in Hong Kong and two representative offices at Shanghai in the People’s Republic of China and at Abu Dhabi in the United Arab Emirates. The bank is planning to open offices in 10 different countries with its focus on Australia, Canada and the United Kingdom.
August 27, 2008
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Union Bank of India
Business through charts Rupee Invested - FY08
Rupee Financed - FY08 Other Liabitlies 7%
Borrowings 4%
Reserves & Surplus 6%
Capital 0%
Fixed Assets Other Assets 3% 2%
Rupee Allocated - FY08
Rupee Earned - FY08 Fee based Income 6%
Provisions 8%
Staff Cost 9%
Taxes 5%
Other Operating Expenses 8%
Interest Income 90%
Interest Expenses 70%
P/E band
350
Balances with Banks and money at call and short notice 1%
Advances 59%
Deposits 83%
Treasury Income 4%
Cash and Balances with RBI 8%
P/ABV
2.50 10x
280
2.00
210
7x
140
5x 3x
70 0
1.50 1.00
August 27, 2008
Aug-08
Mar-08
Jun-07
Nov-07
Jan-07
Sep-06
Apr-06
Dec-05
Jul-05
Mar-05
Oct-04
May-04
Jan-04
Aug-03
Apr-03
Mar-08
Aug-08
Nov-07
Jun-07
Jan-07
Apr-06
Sep-06
Dec-05
Jul-05
Mar-05
Oct-04
Jan-04
May-04
Aug-03
Apr-03
0.50
Page 24
Union Bank of India
Analysis of financial performance during first three months of FY09 Total business grew by 21.5% yoy with strong growth in deposits (23.3% yoy) and advances (19.0% yoy). Deposits grew on the back of excellent growth in CASA at 28.9% yoy. The bank also shed high cost deposits by 13.69% as CASA stood at 34.76%, an improvement of 150 bps yoy. Growth in advances was led by 40.9% yoy growth in SME sector and 19.3% yoy in retail segment. Total investments were Rs. 353.5 bn. Of this, Held to Maturity was 67.45% while Available for Sale was 32.58%. Duration for HTM was 4.09 yrs with 2.72 yrs duration for AFS portfolio. Interest income grew by 20.0% yoy due to improvement in yield by 10 bps yoy to 10.13% as of June’08. Interest expenses also increased by 28.6% yoy on account of higher interest rates. Cumulative effect of this has resulted in only 5.0% yoy growth in Net Interest Income. In fact NII de-grew by 2.9% qoq. Operating Profits improved by 17.3% yoy to Rs.6.16 bn from Rs.5.25 bn. Operating profits were negatively affected by CRR hike (Impact –Rs 400 mn) and reduction in BPLR (Impact – Rs 600 mn). The Cost to Income ratio, which reflects the operating efficiency of the bank was at 40.31% and is one of the lowest among peer banks. Cost to income ratio improved by 437 bps due to extensive use of technology with 100% rollout of Core Banking Solution. Asset quality has also seen considerable improvement with GNPAs reduced to 2.08% from 2.78% in June 07. NNPAs also reduced to 0.15% from 0.78% in Q1FY08 on account of improvement in loan loss coverage ratio to 93.05% from 72.55% in Q1FY08. Improved asset quality was reflected in declining trend in delinquency ratio that stood 0.85% in Q1FY09 as compared to 1.30 in Q1FY08. Capital Adequacy Ratio was at 12.22% as of 30th June 2008 as against 12.66% as on 30th June 2007. Basel II – CAR was at 11.28%, of which Tier I was 6.93%.
Others 25%
Recovery in write-off accounts 10%
August 27, 2008
Treasury 4%
Commission , Exchange and Brokerage 61%
Page 25
Union Bank of India
Key Risks Further monetary tightening may put pressure on margins: We expect further rate hike by the RBI considering continuing inflationary pressures. Very high interest rate regime still remains the key risk to the bank’s performance. Although we have factored in 50 bps hike in key rates, coping with further monetary tightening is still the biggest challenge that the bank may face. Additional monetary tightening may put further pressure on the bank’s net interest margins. Bank may experience delinquencies: Although UBI has got a prudent credit lending policy, risk of fresh delinquencies still exists. The bank may experience additional delinquencies in case interest rates go very high. We do believe UBI is less prone to additional delinquencies due to its quality lending and excellent loan loss provision. Our valuation is also on the basis of 100% loan loss coverage ratio that is very conservative in nature. Investment portfolio exposed to MTM losses: UBI’s investment portfolio is exposed to MTM losses in case yield on bonds move sharply. Currently AFS constitutes 33% of the total investment portfolio and duration is 2.72 years. Of this, bond portfolio was around 55% of AFS. We estimate MTM loss of Rs. 1.61 bn in case bond yield moves upward by 100 bps (bear case scenario).
About Union Bank of India Union Bank of India is a large public sector bank. It was established in 1919 and has its registered office in Mumbai. UBI has a network of 2,514 outlets across India and 20 million customers at over 1,500 centres. All the branches are integrated under the core banking solution. The bank offers a variety of branch wide services, including Demat accounts, online trading of securities, mutual funds and insurance. It is a bank with a large balance sheet, healthy asset quality, strong distribution network, low operating costs, and technology that is ahead of peers. However, the high interest rate regime may put pressure on its margins and affect its profitability.
August 27, 2008
Page 26
Union Bank of India
Financial Statements Income Statement For the year ended 31st March (Rs.mn)
FY06
FY07
FY08
FY09E
FY10E
58,637 34,894 23,743 15.0% 4,945 28,688 1.3% 14,024 8,668 5,356 14,664 -6.8% 5,717 8,946 2,195 6,752
73,822 45,920 27,902 17.5% 6,865 34,768 21.2% 14,759 8,737 6,022 20,008 36.4% 6,204 13,804 5,350 8,454
94,473 63,609 30,864 10.6% 10,870 41,733 20.0% 15,930 8,453 7,477 25,803 29.0% 7,199 18,604 4,734 13,870
122,142 89,010 33,131 7.3% 12,944 46,075 10.4% 19,121 8,960 10,161 26,954 4.5% 7,464 19,489 5,847 13,643
145,761 106,488 39,273 18.5% 15,658 54,931 19.2% 22,522 9,408 13,114 32,409 20.2% 8,986 23,424 7,027 16,396
-6.1%
25.2%
64.1%
-1.6%
20.2%
FY06
FY07
FY08
FY09E
FY10E
5,051 40,530 740,943 39,744 64,992 891,260
5,051 46,848 851,802 42,155 80,923 1,026,779
5,051 68,426 1,038,586 47,605 81,064 1,240,733
5,051 80,029 1,298,233 57,358 89,171 1,529,841
5,051 82,783 1,622,791 69,752 98,088 1,878,465
ASSETS Cash and Balances with RBI 43,873 Bal. with Banks and money at call and short notice 20,032 Investments 259,176 - Out of which SLR Investments 202,817 Advances 533,800 Fixed Assets 8,104 Other Assets 26,275 Total Assets 891,260
59,176 25,089 279,818 229,054 623,864 8,250 30,582 1,026,779
94,547 6,431 338,226 282,171 743,483 22,004 36,041 1,240,733
143,744 7,074 403,400 342,701 904,401 27,973 43,249 1,529,841
190,197 7,428 491,885 426,939 1,103,370 33,687 51,899 1,878,465
Interest Income Interest Expenses Net Interest Income - growth % Other Income Operating Income - growth % Operating Expenses - Staff Cost - Other Operating Exp. Pre-Provision Profits (PPP) - growth % Provisions Profit Before Taxes Taxes Profit After Taxes - growth %
Balance Sheet For the year ended 31st March (Rs.mn) LIABILITIES Capital Reserves & Surplus Deposits Borrowings Other Liabitlies Total Liabilities
August 27, 2008
Page 27
Union Bank of India
Ratio Analysis Year to 31st March
FY06
FY07
FY08
FY09E
FY10E
Basic Ratio (Rs.) EPS Book Value per share 75% Adjusted Book Value 100% Adjusted Book Value Dividend per Share
13.37 81.02 74.89 64.51 3.50
16.74 93.71 91.08 81.81 2.00
27.46 111.33 117.00 108.80 4.00
27.01 134.30 139.93 132.14 3.50
32.46 139.75 147.05 137.92 3.50
11.17 6.45 4.72
11.43 6.87 4.56
11.89 6.98 4.91
11.54 7.01 4.53
11.00 6.57 4.44
Asset Quality (%) Gross NPAs Net NPAs NPA Coverage Delinquency Ratio
3.84 1.56 60.25 1.38
2.94 0.96 67.91 1.18
2.18 0.17 92.30 1.00
2.00 0.10 0.10 1.00
2.00 0.10 0.10 1.00
Profitability Ratios (%) ROAE ROAA NIM Operating Cost to Income Fee-based Income to Total Income Fee-based Income to Operating Income Other Income to Total Income Other Income to Operating Income Employee Cost to Operating Income
18.67 0.84 3.06 48.89 5.96 13.21 7.78 17.24 30.21
19.16 0.88 3.02 42.45 6.63 15.40 8.51 19.75 25.13
26.79 1.22 2.84 38.17 6.47 16.34 10.32 26.05 20.25
21.99 0.98 2.77 41.50 6.23 18.26 9.58 28.09 19.45
23.69 0.96 2.72 41.00 6.41 18.83 9.70 28.50 17.13
8.04 7.56 4.64 4.76 3.09 0.64 1.91 0.88
8.76 8.00 5.07 5.29 3.06 0.75 2.19 0.93
9.85 8.70 6.09 6.20 2.86 1.01 2.39 1.29
10.75 9.25 7.00 7.07 2.51 0.98 2.04 1.03
10.60 8.97 6.77 6.82 2.41 0.96 1.99 1.01
Other Ratios (%) Credit / Deposit Incremental Credit / Deposit Investment / Deposit
73.7 110.4 35.0
74.7 81.3 32.9
73.1 65.4 32.6
71.0 62.8 31.1
69.3 62.5 30.3
Valuation ratios (x) P/E P / BV P / ABV (75% coverage ratio) P / ABV (100% coverage ratio)
10.02 1.65 1.79 2.08
8.01 1.43 1.47 1.64
4.88 1.20 1.15 1.23
4.96 1.00 0.96 1.01
4.13 0.96 0.91 0.97
Capital Adequacy Ratio (%)* CAR Out of which Tier I Tier II * as per Basel II; calculated
Spread Analysis (%) Yield on Advances Yield on Interest-Earning Assets Cost of Deposits Cost of Funds Net Interest Income to AWF Non Interest Income to AWF Operating Profit to AWF Net Profit to AWF
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Union Bank of India
RATING SYSTEM BUY = Expected to outperform the BSE Sensex by 15% or more over a 12 months’ time frame. MO = Market Outperformer - Expected to outperform the BSE Sensex by 10% or more over a 12 months’ time frame. MP = Market Performer - Expected to be a neutral performer relative to the BSE Sensex over a 12 months’ time frame. MU = Market Underperformer - Expected to underperform the BSE Sensex by 10% or more over a 12 months’ time frame. SELL = Expected to underperform the BSE Sensex by 15% or more over a 12 months’ time frame
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