Focus on quality assets, branch expansion and technology will drive growth for Union Bank of India in a profitable manner.
Union Bank of India (UBI) is a counter in the banking sphere where investors can take exposure with a medium term perspective.
UBI holds its ground in these uncertain times on the weight of its performance, increasing use of technology, focus on youth and relatively high operational efficiency. Its focus on profitability rather on volumes will also help build a strong balance sheet.
The bank’s new logo unveiled this month indicates its desire to reinvent itself and stand apart in a crowded marketplace.
Business growth
UBI’s business (advances and deposits) has grown by roughly 20 per cent in the last few years to Rs 180,000 crore in FY08.
A big chunk of the growth in advances has come from the SME segment, while the growth in deposits is consequent to the bank’s focus on low-cost CASA deposits (banks pay zero interest on Current Account deposits, while they pay just 3.5 per cent per annum on Savings Account deposits).
To give some numbers, advances to high yielding SME segment has grown between 35-39 per cent annually in the last two years. Likewise, the share of CASA deposits in total deposits has inched up by 250 basis points to 34.86 per cent during the same period, which is contrary to the experience of its peers--the average CASA level of public sector banks has fallen by 4.2 percentage points in the past two years.
UBI’s focus on CASA has helped sustain healthy net interest margins (NIM) and reduce volatility in the deposits portfolio.
On the flip side, last year, net interest income (NII) grew by just 10.61 per cent as the rising interest rate scenario has pushed up the overall cost of deposits. Additionally, the benefits of increased prime lending rates (PLR) will only be felt in the coming quarters.
Nonetheless, net profit growth has been impressive on the back of sustained efforts towards improving operational efficiency and focus on non-interest income like third party product distribution.
The bank is among the only few large public sector banks to move successfully all its 2,526 branches to CBS platform (fully networked), which is impressive given that nearly 56 per cent of its branches are in rural and semi urban areas.
Margin focus
In the fund-based business, to protect its margins, UBI has been in favour of mobilising CASA deposits rather than wholesale deposits, for sometime. In fact, CASA deposits have been growing at the rate of 28 per cent in the last three years.
For the current fiscal, UBI plans to expand its branch network by 500 branches. Such expansions, it believes, should help further increase the share of these low-cost deposits, bringing the bank closer to its target of 40 per cent by 2012.
Likewise, the bank is also keeping a tight control over asset quality, which is also partly reflected in the declining bad loans (NPAs). Since 93 per cent of the doubtful loans have already been provided for, the same provides confidence.
Union Bank's cost-to-income ratio is also among the lowest within the public sector banking system at 38.2 per cent (it was about 49 per cent in FY06), thanks to the increasing use of technology.
While this may have freed up some staff, UBI plans to recruit 3,000 people in the next 1-2 years to achieve its growth plans. These additional human resources will help the bank in cross selling of products, including third party (insurance, mutual funds, wealth management services, equity broking, etc), and thus, shore up its fee-based income.
Going forward, while all its branches are now fully networked, the bank is also aiming to expand its internet/electronic banking platform. It plans to have at least 25 per cent of its transactions take place through the electronic mode by March 2009, compared with six per cent two years ago and 12 per cent currently. Introduction of the biometric card is another innovation, which will improve revenues from rural areas.
| HEALTY FINANCIALS | |||||
| Rs crore | FY 07 | FY 08 | % Chg | Q1 FY08 | Q1 FY09 |
| Net Interest Income | 2,790.00 | 3,086.00 | 10.60 | 734.00 | 810.00 |
| Other Income | 687.00 | 1,087.00 | 58.20 | 215.00 | 222.00 |
| Net Profit | 845.00 | 1,387.00 | 64.10 | 225.00 | 228.00 |
| Business per employee | 5.39 | 6.20 | 15.03 | 5.52 | 6.64 |
| NIM (%) | 3.05 | 2.80 | - | 2.96 | 2.63 |
| CASA (%) | 34.50 | 34.86 | - | 33.26 | 34.76 |
| Net NPA (%) | 0.96 | 0.17 | - | 0.78 | 0.15 |
| Cost to Income (%) | 42.45 | 38.17 | - | 44.68 | 40.31 |
Global foray
UBI’s business is distributed across the country, with strategic concentration in western India, it is venturing into emerging markets like Middle East and Asian countries. Plans are afoot to open branches in 10 overseas locations including Sydney, London, Canada and Indonesia.
UBI’s inclination to expand abroad will help in catering to the NRI diaspora, facilitation of Indian corporates nurturing ambitions of global acquisitions, open doors for trade financing and financing local industries (in foreign countries). These moves should prove beneficial for the bank, but in the longer run.
| GROWTH CURVE | |||
| Rs crore | FY 2008 (A) | FY 2009 (E) | FY 2010 (E) |
| Net Interest Income | 3,086 | 3,464 | 4,043 |
| Other Income | 1,087 | 1,267 | 1,478 |
| Operating Profit | 2,580 | 2,861 | 3,329 |
| EPS (Rs) | 27.50 | 29.00 | 34.00 |
| P/BV (x) | 1.35 | 1.18 | 1.06 |
| E:Analysts estimates | |||
Investment rationale
The bank has indicated that it will use only retail deposits to grow its loan book, which should help contain its cost of funds and provide some cushion during the current times of rising interest rates. Focus on the medium and large sized companies, with priority to quality, should ensure profitable growth with a lower element of risk.
On the other hand, use of technology will help keep a tab on operational costs and improve non-interest income, all of which should help sustain profitability; though some bit of operational cost pressure could be felt in the near-term due to the bank’s recruitment plans.
Given its plans in its core banking business, as well as its foray into the asset management (AMC; mutual funds) and insurance businesses, UBI may need to shore up its capital. The bank has a provision to raise up to Rs 3,500 crore.
Although its capital adequacy ratio (CAR) as of March 2008 stood comfortably at 12.51 per cent, an equity dilution (in next 18 months) is not ruled out; the extent of which will depend on the secondary market conditions.
On the positive side, its foray into the life insurance (with Dai-Ichi Life Insurance, Japan and Bank of India) and AMC (KBC NV) businesses should pay off in the long-term.
A positive trigger could emerge in the form of any move to grow bigger through the inorganic (acquisition) route. Meanwhile, in organic terms, the bank expects its business to grow to Rs 220,000 crore; advances and deposits growth of roughly 22 per cent each, in FY09.
On the macro front, the domestic inflation rate is showing signs of stabilising while global crude oil and commodity prices have been on a decline lately, all of which are positive indicators.
This is also reflecting in lower bond yields, which suggests that UBI’s mark-to-market losses on account of provisions on investment portfolio (provisions of Rs 339 crore were largely responsible for the depressed profit growth in Q1FY09) should not be significant in the next 1-2 quarters.
At Rs 150.90, the stock is trading at just 1.18 times it’s estimated FY09 book value, and can deliver about 20-25 per cent in a year’s time.
