Union Bank of India Update

Union Bank of India
Recommendation: Buy
Price target: Rs230
Current market price: Rs200

Q3FY2008 results: First-cut analysis

Result highlights

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For Q3FY2008 Union Bank of India reported a profit after tax (PAT) of Rs365 crore, beating our estimate of Rs298.8 crore. The Q3FY2008 PAT indicates a growth of 42.7% year on year (yoy), driven by a healthy growth in interest income and a jump in non-interest income coupled with lower provisions.
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The reported net interest income (NII) stood at Rs788 crore, reflecting a growth of 14.9% yoy and 17.1% qoq. Meanwhile, the non-interest income witnessed a whooping growth of 69.3% yoy to Rs347.5 crore.
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During Q3FY2008, the operating expenses jumped by 29.5% yoy to Rs499.7 crore. The growth can be traced to a 55.1% year-on-year (y-o-y) increase in the other operating expenses while, the staff expenses grew by 14.5% yoy. Despite the significant increase in the operating expenses, the cost-income ratio was marginally up by 1% to 44%.
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Notably, the provisions during the quarter declined by 22.2% yoy on reported basis, which pushed the PAT growth.
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Asset quality remained robust during the quarter with gross non-performing assets (GNPA) witnessing a 18.1% y-o-y decline to Rs1,524.8 crore. Meanwhile, the net non-performing assets were down significantly by 60% to Rs873.2 crore.
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Capital adequacy ratio (CAR) remained healthy at 13% at the end of December 2007 compared with 13.2% at the end of December 2006 and 11.6% at the end of September 2007.
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At the current market price of Rs200, the stock is quoting at 7.8x FY2009E earnings per share (EPS), 4x its 2009E pre-provisioning profit (PPP) and 1.5x FY2009E book value. We are revisiting our earnings model following the higher-than-expected numbers released by the bank.