Union Bank's numbers for the March 2009 quarter were a tad disappointing with net profits falling 11 per cent y-o-y. Apart from the fact that the core net interest income didn't grow as expected, the bank also incurred some one-time costs on expanding the branch network and on employees.
In a challenging interest rate environment, in which lending rates fell and the impact of the higher rates paid for deposits in earlier quarters continued to be felt, it wasn't surprising that the bank saw a sequential drop in the net interest margin (NIM) of 90 basis points to 2.8 per cent. As a result, the net interest income grew just 20 per cent, although the loan growth was a much higher 29 per cent. The good news is that the share of cheaper current and savings accounts (CASA), which saw a particularly sharp fall in the December 2008 quarter, saw a very slight sequential dip in March to just over 30 per cent.
So, while it may take another quarter, the NIM should improve with deposits being repriced. Also, even though gross non-performing loans (NPLs) increased 23 per cent sequentially - net NPLs too rose significantly by over 150 per cent - it should be remembered that the base is low. With gross NPLs of 2 per cent and net NPLs of 0.3 per cent, the book is among the cleanest in the business.
Besides, although the coverage may have dropped a little, at 83 per cent it is arguably way above what many banks have. The restructured loans, including applications, amount to 3.3 per cent, is probably a little higher than what the management had expected but better than peers.
The bank's loan growth could moderate to 20 per cent this year from 29 per cent last year, but being well capitalised - Tier I capital at 8.3 per cent - it can take advantage of an economic recovery. Analysts point out that at Rs 160, the stock trades at just under one-time price to the expected book for 2009-10 and is attractively valued, given the return on average equity of 19 per cent.
