>UNION BANK OF INDIA (ICICI DIRECT)

Growing via the quality route …

UBI’s ability and focus to grow via the quality route (moderate credit growth coupled with focus on branch expansion to build strong liability franchise), opex under check relative to expansion as a result of adequate rollout of technology infrastructure & business process and, above all, the policy to maintain high loan loss coverage ratio makes UBI command a premium in terms of valuation multiple relative to its peers. We expect the bank to post a business CAGR of 19% over FY09- FY11E. We are initiating coverage on the stock with a target objective of Rs 249 over 12-15 months and rate the stock as PERFORMER.

■ Focus on Liability franchise + moderation in credit growth
Containing the cost of funds via expanding its low cost liability franchise is the key focus of Union Bank of India (UBI). The bank has plans to add 500 branches in FY10, which will bring traction in low cost CASA deposits. On the lending front, UBI will continue to focus its lending more
towards quality corporates, medium enterprises and the agri sector.

■ High provisioning to provide cushion to asset quality
As of Q4FY09, the NNPA for UBI stood at 0.35% (NNPA is one of the best for UBI in the PSU space). We can attribute such a low NNPA to the fact that UBI has been maintaining the highest loan loss coverage ratio of more than 83% during FY09. The bank has been using the strong
profitability to provide for NPAs, which has enabled the bank to contain its NPAs.

■ Superior operating efficiency always a prerogative
Focus on control of opex relative to expansion plans has been the key catalyst for UBI’s growth. Also, 100% of its braches are based on CBS and posses the necessary infrastructure so as to carry on business smoothly.

■ Valuation
At CMP of Rs 218, the stock is trading at 1.1x and 1x its FY10E and FY11E ABV, respectively. We believe that with a better business profile, ability to maintain healthy asset quality and garner higher than industry average RoEs will enable the bank to fetch premium valuation multiples. We value the stock at 1.3x its FY10E ABV to arrive at a fair value of Rs 249.

To see full report: UBI