>UNION BANK OF INDIA: 3QFY12 Earnings

■ 3QFY12 earnings were substantially below ours and street estimates at INR2 bn (down 66% YoY), mainly due to one-off provision of INR3.5bn on restructuring of a telecom sector exposure. Stock ended 2.8% below its yesterday’s close.


■ Operational review: UNBK’s results were actually in line with our estimates, had it not been for the one-off provisions on restructured loans. Loan growth picked up after no growth in 1H, growing 6% QoQ and 17% YoY. CASA, too, improved marginally by 45 bps to 32.5%. NIMs improved by 10 bps to 3.31% helped by higher yield on funds, while other income growth was steady at 20% YoY. Chunky pension-related expenses pulled down operating profit growth to just 2%. Asset quality was a mix bag with sequentially falling slippages on one hand but higher restructured loans on the other. Bank restructured INR 20.4 bn loans, of which INR15 bn was a telecom infra company exposure taking an NPV loss of INR 3.5 bn.


■ Earnings outlook: While UNBK has limited exposure to the high risk sectors of aviation and SEB, we are still building in higher slippages at 2.5-3% levels upto FY14e. Also, margins likely to come off slightly in down-trending rate environment and therefore, we cut our earnings by 18.6% for FY12, 14.6% for FY13 and 13.3% for FY14.


■ Valuations: Stock is currently trading at 5.7x PE and 0.8x PB (12-mnths rolling) vs its 5-yr average of 6x PE and 1.2x PB and trades at 4% discount on PE and 21% on PB to peers (ex-SBI). We believe that UNBK has taken a lot of asset quality stress upfront in the past few quarters. Going forward, asset quality risks could be relatively lower than peers, given it has a no exposure to high-risk aviation sector, while its exposure to SEBs is largely limited to profit making SEBs. Thus, the stock’s significant discount to peers could potentially close, particularly in 2HFY13E once restructurings abate. We retain our target multiples of 5x PE and 0.8x PB, while rolling forward our earnings, giving us a target price of INR236 (INR250) and implying a potential return of 18%. Retain OW. Key downside risks: 1) weak asset quality trends 2) negative margins surprise 3) management change.




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