For 4QFY2011, Union Bank of India (UBI) posted a decent set of results with sequentially stable NIMs and halving of slippages but employee benefit related liabilities were on the higher side. Effective tax rate for the quarter (at 16.6%) compared to 32.7% in 3QFY2011, partly aided the profitability. Post the recent run-up in the stock on the back of results, we recommend an Accumulate.
Healthy business growth with stable NIMs and lower slippages: For 4QFY2011, the bank’s business momentum was healthy with advances and deposits growing by 12.9% qoq and 8.5% qoq, respectively. The growth was brought about while maintaining margins intact compared to peers who have witnessed relatively higher decline in NIMs sequentially. CASA deposits growth moderated to 19.2% yoy from 33.4% yoy in 3QFY2011 due to sequential decline of 3.7% in saving account deposits. However bank was able to sustain CASA ratio on a yoy basis at 31.8% on the back of good growth in current account deposits. Reported NIM was sequentially stable at 3.44%. On the asset-quality front, the bank surprised positively by reporting substantially lower slippages sequentially compared to peers witnessing surge in slippages. The annualised slippage ratio for the quarter declined to 1.4% from peak of 3.8% in 2QFY2011. However the reported provision coverage ratio dipped by 262bp qoq to 67.6% due to lower credit costs.
Outlook and valuation: In our view, UBI is structurally among the more profitable and competitive PSU banks. We have a positive outlook on the bank due to its robust traction in CASA deposits and relatively fast-expanding branch network over the last few years. The stock is trading at 1.2x FY2013E P/ABV which is below its five year median of 1.3x. Hence, we recommend an Accumulate on the stock, with a Target Price of `356, based on median level of 1.3x
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