>UNION BANK OF INDIA (CITI)

1Q10 Results: Not A Margin(al) Impact

■ 1Q10 profits up 94% YoY, but NIMs under significant pressure — Union's profits were 28% above estimates led by higher fee growth and trading gains. Growth remained strong and management is hopeful of maintaining stable asset quality. The key pressure point of the quarter was, however, a sharp 50bps drop in NIMs, which overshadows gains in the quarter.

■ Sharp margin pressure overshadows fee growth and support from bond gains — Union's NIMs declined 50bps QoQ to 230bps, sharply ahead of 10-15bps declines amongst peers. High growth in high-cost deposits and declining loan yields resulted in margin pressure. Management suggests repricing of deposits in 2Q/3Q and targets FY10 NIMs of 300bps (which looks ambitious, in our view). Fee growth of 47% YoY was strong and reverses the previous quarter's slower growth. A jump in bond portfolio gains further boosted profits in 1Q10.

■ Growth at a strong clip, with stable asset quality — Loan growth continued at 27% YoY, spread well amongst various segments with retail and agriculture growing faster. Management suggests credit demand is picking up and is hopeful of 25% growth in FY10 (also targets 500 new branches). Deposit growth at 34% is relatively high, mix has deteriorated to 30% CASA (34% in
4Q09) and Union has paid the price in NIMs. While management is keen to grow at a fair clip, the challenge is to improve NIMs.

■ Quality bank, but valuations leave little room for disappointment — Union still has amongst the best fee growth, cost ratios and asset quality relative to peers. However, 1.2x 10E P/BV valuation leaves little room for further disappointment.

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