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3QFY2010 Result Update I Banking

January 28, 2010

Please refer to im ortant disclosures at the end of this re ort Sebi Re istration No: INB 010996539

Investment Period 15 Months

Stock Info

Sector Banking

Market Cap (Rs cr) 12,891

Beta 0.7

52 WK High / Low 291/115

Avg. Daily Volume 210768

Face Value (Rs) 10

BSE Sensex 16,307

Nifty 4,867

Reuters Code UNBK.BO

Bloomberg Code UNBK@IN

Shareholding Pattern (%)

Promoters 55.4

MF/Banks/Indian FIs 18.2

FII/NRIs/OCBs 16.2Indian Public 10.1

Abs. (%) 3m 1yr 3yr

Sensex 0.1 76.1 14.2

Union Bank (3.7) 73.6 127.5

Union Bank of India reported a Net Profit de-growth of 20.5% yoy, against ourestimate of a 34% de-growth, on account of higher-than-expected net interestincome and non-interest income. Reflecting sectoral trends, the yoy growth inadvances was down to 14.6%, while deposit growth was more sedate at 16.5%(28.6% in 2QFY2010). Strong improvement in NIMs, with reasonableasset-quality was the key positive from the results. We upgrade the stock to Buyfrom Accumulate.

Improving Profitability, with reasonable Asset-Quality: With a narrowing

gap between deposit growth and loan growth, the credit-deposit ratioimproved by 381bp sequentially to 70.5% in 3QFY2010. On the liability-side,high cost deposits (9% and above) came down from Rs45,400cr in

4QFY2009 to Rs13,000cr in 3QFY2010. The Net Interest Margin (NIM)improved by 37bp to 2.71% in 3QFY2010. Non-interest income grew by 18.5% yoy to reach Rs465cr in 3QFY2010, with core fee income and treasury gains constituting 46.0% and 28.2%, respectively. Gross NPAs increased by 9.1% sequentially to Rs2,092cr, and the ratio of Gross NPA to Advances stoodat 2.0% (from 1.9% in 2QFY2010). The banks cumulative restructured loans(under the facility-wise method of classification) stood at Rs4,711cr, forming4.4% of the total loans (46% of the Networth), which is in line with the sectoraverage. Although the asset-quality is under moderate pressure, the provisioncoverage of the bank stood at a healthy 80%.

Outlook and Valuation: The bank is structurally among the more profitable

and competitive PSU Banks, with robust traction in CASA deposits, consistency in core fee income growth and its fast expanding branch network. Moreover,given the traction in the banks retail deposit franchise, driven by branchexpansion, we expect the banks performance on the NII front to be betterthan its peers in FY2011E as well. At the CMP, the stock is trading at 5.4xFY2012E EPS of Rs47.6 and 1.1x FY2012E Adjusted Book Value of Rs240.7.We upgrade the stock to Buy from Accumulate, with a 15-month Target Priceof Rs313, indicating an annualised return of 17.8%.

Key Financials Y/E March FY2009 FY2010E FY2011E FY2012E

NII 3,814 3,883 4,831 5,461

% chg 23.6 1.8 24.4 13.0

Net Profit 1,727 2,027 2,120 2,403

% chg 24.5 17.4 4.5 13.3

NIM (%) 2.8 2.3 2.4 2.3

EPS (Rs) 34.2 40.1 42.0 47.6

P/E (x) 7.5 6.4 6.1 5.4

P/ABV (x) 1.8 1.5 1.3 1.1

RoA (%) 1.2 1.1 1.0 1.0

RoE (%) 27.2 25.8 22.4 21.4Source: Company, Angel Research

Union Bank of IndiaPerformance Highlights

BUY CMP Rs255Target Price Rs313

Vaibhav AgrawalTel: 022 4040 3800 Ext: 333E-mail: [email protected]

Amit RaneTel: 022 4040 3800 Ext: 326E-mail: [email protected]

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Union Bank of India I 3QFY2010 Result Update

Exhibit 1: 3QFY2010 Performance Y/E March (Rs cr) 3QFY10 2QFY10 % chg (qoq) 3QFY09 % chg (yoy) 9MFY10 9MFY09 % chgInterest Earned 3,294 3,206 2.7 3262 1.0 9,674 8,626 12.2Interest Expenses 2,229 2,342 (4.8) 2133 4.5 6,945 5,712 21.6

Net Interest Income 1,065 863 23.3 1128 (5.6) 2,730 2,914 (6.3)Non-Interest Income 465 555 (16.3) 392 18.5 1,549 897 72.7Total Income 1,529 1,419 7.8 1520 0.6 4,279 3,811 12.3Operating Expenses 615 609 1.1 666 (7.6) 1,767 1,640 7.7Pre-Prov. Profit 914 810 12.9 855 7.0 2,512 2,171 15.7Provisions & Cont. 161 135 19.3 -45 458.5 486 454 7.1PBT 753 675 11.6 900 (16.3) 2,025 1,716 18.0Prov. for Taxes 219 170 28.8 228 (3.9) 544 455 19.6PAT 534 505 5.8 672 (20.5) 1,481 1,261 17.4EPS (Rs) 10.6 10.0 5.8 13.3 (20.5) 29.3 25.0 17.4Cost to Income (%) 40.2 42.9 43.8 41.3 43.0

Effective Tax Rate (%) 29.1 25.2 25.3 26.9 26.5

Net NPAs (%) 0.6 0.2 0.1 0.6 0.1Source: Company, Angel Research

The ga p b etwee n de po sit growth and loan g rowth narrows

The Banks loans registered a 14.6% growth yoy, while deposits grew by 16.5% yoy (down from a 28.6% yoy growth in 2QFY2010). As a result, the credit-deposit ratioimproved by 381bp sequentially to 70.5% in 3QFY2010. The management hasmaintained its growth guidance for loans to 18% by the end of the year. We arepresently factoring in a 16% loan growth for FY2010E.On a positive note, on the liability-side, high cost deposits (9% and above) havecome down from Rs45,400cr in 4QFY2009 to Rs13,000cr in 3QFY2010. The

banks CASA ratio was stable at 32.3% (32.9% in 2QFY2010), registering areasonable yoy growth of 24.1%. As a result of these factors, the Net Interest Margin(NIM) improved by 37bp to 2.71% in 3QFY2010.

Exhibit 2: Trend in Advances & Deposits

Source: Company, Angel Research

0.05.0

10.0

15.020.025.030.035.040.0

3QFY2008

4QFY2008

1QFY2009

2QFY2009

3QFY2009

4QFY2009

1QFY2010

2QFY2010

3QFY2010

Advances Growth (% yoy) Deposit Growth (% yoy)

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Strong sequential NII Growth

The Net Interest Income increased 23.3% sequentially and declined 5.6% yoy toRs1,065cr in 3QFY2010. However, going forward, with an improving CASA ratioand a reduction in the proportion of high-cost deposits, coupled with an

improvement in the underlying credit demand in 4QFY2010 driving an improvingCredit/Deposit ratio, we expect the NIM to remain stable. Moreover, given thetraction in the banks retail deposit franchise, driven by branch expansion, we expectthe banks performance on the NII front to be better than its peers in FY2011E aswell.

Exhibit 3: NIMs, SpreadsPeriod (%) 3QFY09 2QFY10 3QFY10

Yield on Funds 9.32 7.95 7.96

Cost of Funds 6.10 5.81 5.39

Net Interest margin 3.22 2.34 2.71


Non-interest Income Growth driven by Treasury Gains

Non-interest income grew by 18.5% yoy to reach Rs465cr in 3QFY2010, with corefee income and treasury gains constituting 46.0% and 28.2%, respectively. The profiton forex transactions declined by 20.9% yoy to Rs83cr. We expect the core non-interest income of the bank to be largely in-line with the loan growth duringFY2010-2012E.

Exhibit 4: Composition of Non-Interest Income

Period (Rs cr) 3QFY10 2QFY10 % chgqoq

3QFY09 % chgyoy

Recovery of Bad Debts 37 42 (11.9) 27 37.0Profit on Sale of Investments 131 218 (39.9) 101 29.7Profit on ForexTransactions 83 78 6.4 105 (21.0)Core Non-Interest Income 214 217 (1.4) 162 32.1Total Non-Interest Income 465 555 (16.2) 395 17.7Source: Company, Angel Research

Costs remain in check

During 3QFY2010, the cost-to-income ratio improved to 40.2% from 42.9% in2QFY2010, in line with our expectations. The total operating expenses declined by 7.6% yoy and rose marginally on a sequential basis. The bank opened 55 branchesand 122 ATMs, to take the total to 2,876 and 2,249, respectively. The bank aims tomaintain a long-term cost-to-income ratio of 42%.

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Asset Quality Pressure seen, but reasonable coverage

The banks cumulative restructured loans (under the facility-wise method of classification) stood at Rs4,711cr, forming 4.4% of the total loans (46% of the

Networth), which is in line with the sector average. Gross NPAs increased by 9.1%sequentially to Rs2,092cr, and the ratio of Gross NPA to Advances stood at 2.0%(from 1.9% in 2QFY2010). The bank has utilised write-offs to report the provisioncoverage as per the new guidelines issued by the RBI. The gross slippages during thequarter were at Rs472cr (2.0% annualised slippage ratio). During 9MFY2010, 22restructured accounts were converted into NPAs, amounting to Rs231cr (about 4.9%of the restructured advances at the end of 3QFY2010). Thus, the provision coverageratio stood at 80%, and has come down from the 88.0% level in 2QFY2010, withouttechnical write-offs. The coverage ratio still remained at a comfortable level ascompared to the industry average.

Exhibit 5: Trend in Asset Quality


Highe r Provis ions for Investments

Provisions increased by 459% yoy to Rs161cr, mainly on account of lower NPA provisions and the presence of write-backs of Rs291cr in investment depreciationduring 3QFY2009. During 3QFY2009, the bank had provided Rs166cr towardsstandard assets and NPAs (as against Rs50cr provided during 3QFY2010). Thebanks AFS portfolio constituted 28% of its Investment book, with a moderatemodified duration of 1.9 years (down from 2.6 years at the end of 2QFY2010).However, the overall modified duration was high, at 4.5 years.

Capital Adequacy

The Capital Adequacy Ratio (CAR) of the bank stood at 13.5%, with Tier-1 Capital of 8.7%. The bank has also approached the Government for an infusion of Rs1,800crto meet its expansion plans; Union Bank plans to launch an asset-managementcompany in FY2011E.

-

0.50

1.00

1.50

2.00

2.50

3QFY2008

4QFY2008

1QFY2009

2QFY2009

3QFY2009

4QFY2009

1QFY2010

2QFY2010

3QFY2010

Gross NPA % Net NPA %

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Outlook and Valuation

In our view, the bank is structurally among the more profitable and competitive PSUBanks. We have a positive outlook on the bank, due to its dynamic leadership,robust traction in CASA deposits, consistency in core fee income growth and its fastexpanding branch network. We believe that the NIMs of the bank have bottomed out

from 2QFY2010 and will continue to improve in the coming quarters, as depositsget re-priced downwards and the credit deposit ratio improves. Moreover, given thetraction in the banks retail deposit franchise, driven by branch expansion, we expectthe banks performance on the NII front to be better than its peers in FY2011E aswell. At the CMP, the stock is trading at 5.4x FY2012E EPS of Rs47.6 and 1.1xFY2012E Adjusted Book Value of Rs240.7. We upgrade the stock to Buy fromAccumulate, with a 15-month Target Price of Rs313, indicating an annualised returnof 17.8%.

Exhibit 6: P/ABV Band Union Bank of India


0

50

100

150

200

250

300

350

400

Sep-02

Jan-03

May-03

Sep-03

Jan-04

May-04

Sep-04

Jan-05

May-05

Sep-05

Jan-06

May-06

Sep-06

Jan-07

May-07

Sep-07

Jan-08

May-08

Sep-08

Jan-09

May-09

Sep-09

Jan-10

Price 0.3x 0.65x 1x 1.35x 1.7x

(Rs)

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Income Statement (Rs cr)

Y/E March FY2009 FY2010E FY2011E FY2012E

Net Interest Income 3,814 3,883 4,831 5,461

YoY Growth (%) 23.6 1.8 24.4 13.0Other Income 1,483 2,017 1,801 2,105

YoY Growth (%) 20.3 36.0 -10.7 16.8

Operating Income 5,296 5,900 6,632 7,566

YoY Growth (%) 22.6 11.4 12.4 14.1

Operating Expenses 2,214 2,458 2,802 3,306

YoY Growth (%) 39.0 11.0 14.0 18.0

Pre - Provision Profit 3,082 3,442 3,830 4,260

YoY Growth (%) 13.1 11.7 11.3 11.2

Prov. & Cont. 725 675 937 981

YoY Growth (%) -16.2 -6.9 38.9 4.6

Profit Before Tax 2,357 2,767 2,893 3,279

YoY Growth (%) 26.7 17.4 4.5 13.3

Prov. for Taxation 630 740 773 877

as a % of PBT 26.7 26.7 26.7 26.7

PAT 1,727 2,027 2,120 2,403

YoY Growth (%) 24.5 17.4 4.5 13.3

Ratio Analysis Y/E March FY2009 FY2010E FY2011E FY2012E

Profitability Ratios (%)

NIMs 2.8 2.3 2.4 2.3Cost to Income ratio 41.8 41.7 42.2 43.7

RoA 1.2 1.1 1.0 1.0

RoE 27.2 25.8 22.4 21.4

B/S Ratios (%)

CASA ratio 30.1 30.5 30.4 30.3

Credit/Deposit ratio 69.6 66.7 66.7 67.3

CAR 11.2 12.9 12.0 12.1

- Tier I 6.9 7.5 6.9 7.0

Asset Quality (%)

Gross NPAs 2.0 1.7 1.5 1.3

Net NPAs 0.3 0.1 0.1 0.1

Slippages 1.6 1.7 1.5 1.3

NPA prov. / avg.assets 0.4 0.4 0.3 0.3

Provision coverage 83.1 91.5 90.9 90.4

Per Share Data (Rs)

EPS 34.2 40.1 42.0 47.6

ABVPS (75% Cover) 139.7 171.0 203.6 240.7

DPS 5.0 7.5 8.0 9.0

Valuation Ratios

P/E (x) 7.5 6.4 6.1 5.4

P/ABVPS (x) 1.8 1.5 1.3 1.1

Dividend Yield 2.0 2.9 3.1 3.5

DuPont Analysis

NII 2.7 2.2 2.3 2.2

(-) Prov. Exp. 0.5 0.4 0.4 0.4

Adj. NII 2.2 1.8 1.8 1.8

Treasury 0.2 0.3 0.1 0.1

Int. Sens. Inc. 2.4 2.1 1.9 1.8

Other Inc. 0.6 0.6 0.6 0.6

Op. Inc. 3.0 2.7 2.5 2.4

Opex 1.6 1.4 1.3 1.3

PBT 1.4 1.3 1.2 1.1

Taxes 0.4 0.4 0.4 0.4

RoA 1.2 1.1 1.0 1.0

Leverage 22.5 22.7 22.4 22.2RoE 27.2 25.8 22.4 21.4

Balance Sheet (Rs cr)

Y/E March FY2009 FY2010E FY2011E FY2012E

Share Capital 505 505 505 505

Reserve & Surplus 8,235 9,820 11,466 13,337

Deposits 138,703 167,830 198,040 231,707

Growth (%) 33.5 21.0 18.0 17.0

Borrowings 3,885 3,727 4,398 5,145

Tier 2 Capital 4,890 6,846 8,078 9,532

Other Liab. & Prov. 4,757 6,053 7,353 8,687

Total Liabilities 160,976 194,780 229,841 268,914

Cash balances 8,992 8,392 9,902 11,585

Bank balances 6,993 7,791 9,194 10,757

Investments 42,997 59,495 70,301 81,040

Advances 96,534 111,980 132,136 155,921

Growth (%) 29.8 16.0 18.0 18.0

Fixed Assets 2,335 2,741 3,137 3,560

Other Assets 3,124 4,383 5,171 6,051

Total Assets 160,976 194,780 229,841 268,914Growth (%) 29.7 21.0 18.0 17.0

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Research Team Tel: 022 - 4040 3800 E-mail: [email protected] Website: www.angeltrade.com

DISCLAIMER

This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced orredistributed to any other person. Persons into whose possession this document may come are required to observe these restrictions.Opinion expressed is our current opinion as of the date appearing on this material only. While we endeavor to update on a reasonablebasis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so.Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to changewithout notice. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with therecommendations expressed herein.The information in this document has been printed on the basis of publicly available information, internal data and other reliable sourcesbelieved to be true and are for general guidance only. While every effort is made to ensure the accuracy and completeness of informationcontained, the company takes no guarantee and assumes no liability for any errors or omissions of the information. No one can use theinformation as the basis for any claim, demand or cause of action.Recipients of this material should rely on their own investigations and take their own professional advice. Each recipient of this documentshould make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine themerits and risks of such an investment. Price and value of the investments referred to in this material may go up or down. Past performanceis not a guide for future performance. Certain transactions - futures, options and other derivatives as well as non-investment gradesecurities - involve substantial risks and are not suitable for all investors. Reports based on technical analysis centers on studying charts of astock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with areport on a company's fundamentals.We do not undertake to advise you as to any change of our views expressed in this document. While we would endeavor to update theinformation herein on a reasonable basis, Angel Securities, its subsidiaries and associated companies, their directors and employees areunder no obligation to update or keep the information current. Also there may be regulatory, compliance, or other reasons that may prevent Angel Securities and affiliates from doing so. Prospective investors and others are cautioned that any forward-looking statementsare not predictions and may be subject to change without notice. Angel Securities Limited and affiliates, including the analyst who hasissued this report, may, on the date of this report, and from time to time, have long or short positions in, and buy or sell the securities of thecompanies mentioned herein or engage in any other transaction involving such securities and earn brokerage or compensation or act as

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Note: Please refer important `Stock Holding Disclosure' report on Angel web-site (Research Section).

Disclosure of Interest Statement Union Bank of India 1. Analyst ownership of the stock No2. Angel and its Group companies ownership of the stock No3. Angel and its Group companies Directors ownership of the stock No4. Broking relationship with company covered No

Angel Broking Ltd: BSE Sebi Regn No : INB 010996539 / CDSL Regn No: IN - DP - CDSL - 234 - 2004 / PMS Regn Code: PM/INP000001546 Angel Securities Ltd:BSE: INB010994639/INF010994639 NSE:INB230994635/INF230994635 Membership numbers: BSE 028/NSE:09946

Angel Capital & Debt Market Ltd: INB 231279838 / NSE FNO: INF 231279838 / NSE Member code -12798 Angel Commodities Broking (P) Ltd: MCX Member ID: 12685 / FMC Regn No: MCX / TCM /CORP / 0037 NCDEX : Member ID 00220 / FMC Regn No: NCDEX / TCM / CORP / 0302

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