Emkay Global Financial Services has upgraded United Bank of India (UBI) to `Accumulate` with a price target of Rs 80 as against the current market price (CMP) of Rs 70 in its report dated Jan. 31, 2012. The broking house gave the following rationale:
Results inline; slippages high but recoveries more than offset:
UNTDB`s Q3FY12 NII at Rs 6.7 billion was inline with expectation, however with lower than expected provision, net profit at Rs 2.3 billion was significantly ahead our expectation of Rs 1.3 billion. NII growth was aided by strong advances growth of 8.8%q-o-q and 17bps expansion in NIM`s to 3%. Margin improvement was aided by improvement in LDR as advances growth was higher at 8.8%q-o-q, while deposit grew by relatively lower 5.8% q-o-q. Other income grew by 12%yoy to Rs 1.6 billion inline with expectation. However, significantly lower provisioning resulted in higher than expected growth in net profit.
The slippages remained high at Rs 3.6 billion for the quarter, which didn’t include Rs 3.9 billion aviation exposure. The same will be accounted in next quarter. However, strong reco+upgrades more than offset the same and net slippages of just Rs 693 million were lowest in the last 9-10 quarters. Consequently GNPA/NNPA ratio stands improved at 3.3%/ 2.0%. as against 3.5% and 2.2% in previous quarter. Stable CASA share at 39.8% despite strong advance growth was also commendable.
NIM expansion aided by better yields and improved LDR…:
The bank reported a sharp 22bps expansion in NIM`s to 3.4%. The higher NIM`s was aided by a) 43bps increase in yield on assets b) 200bps q-o-q increase in LDR and c) higher proportion of low-cost deposit franchise.
CASA mix stable despite strong advances growth:
The bank was able to maintain its CASA mix at a healthy level of 39.8%, despite strong advances growth. A sharp 12% q-o-q growth in current account along with 3.9% q-o-q growth in savings account helped to maintain the CASA share.
Asset quality shows improvement; PCR improves by 150bps to 66.5%:
The asset quality improves during the quarter as GNPA/ NNPA ratio declined to 3.3%/ 2% from 3.5%/ 2.2% in Q2FY12 respectively. The improvement in asset quality was led by lower slippages and higher recoveries/ upgradation. However, at Rs 3.6 billion the slippages continued to remain high The bank has not yet classified Kingfisher (Rs 3.5 billion exposure) as NPA, and will be doing it in Q4FY12.
Recoveries/ up-gradations improves inline with mgmt guidance:
The bank reported a handsome recovery/ upgradation of Rs 2.9 billion, as against Rs 1.8 billion in last quarter. The recovery/ upgradation rate for Q3FY12 (annualized) stands higher at 61.3% as against 46.5% in last quarter. The management in Q2FY12 guided for healthy recovery/ upgradation in H2FY12, as it was expecting higher recovery in accounts which were moved to NPA`s due to system based classification.
Valuations and view:
While the bank has performance well at the operating level with sharp improvement in margins and strong advance growth, we do not find comfort with the banks provisioning policy. With Net NPL/ Networth ratio still high at 25%, the bank should have gone for higher provisioning. Capital continues to be a constraint for bank, as Tier I adjusted for NPL, would stand at sub 7%. We have upgraded our numbers for FY12E/FY13E by 24%/3.5% to take into account lower than expected provisions and better than expected recoveries in this quarter. At CMP stock trades at 0.8x FY12 ABV and 0.7x FY13 ABV. Upgrade to Accumulate with price target of Rs 80.