Stock Review: Union Bank of India

 

 

The Union Bank of India's stock is cheaper compared to its peers. Investors can consider this stock for the long term

 

WITH a market capitalisation of Rs 16,000 crore, Union Bank of India is among the top public sector banks. The bank has reported a robust performance in the quarter ended June 30, 2010 on the back of higher growth in loan book and return on assets. We had recommended the stock eight months back and since then, the stock has surged 11% compared with 4% rise in the broad-based Sensex. The current quarter results have shown that the bank can give higher returns to investors going forward.

BUSINESS & FINANCIALS:

Union Bank of India (UBI) has a network of 2,830 branches spread across the country. Such a wide branch network has helped the bank in maintaining low-cost current account and savings account (CASA) deposits in excess of 30% of total deposits for the past five financial years. It also lowered its cost of funds substantially. CASA balances formed 33% of total deposits at the end of the first quarter of FY11.

   The bank's net profit grew 25% in the quarter ended June 30, 2010 compared over the year ago period, the highest in the past three quarters. This also shows that the bank has come a long way since the December '09 quarter when it suffered a dip in bottomline. The surge in the net profit was driven manly by a 29% growth in advances. The bank has outpaced its industry in terms of loan book growth. Net non-performing assets (NPA) rose by 22 basis points to 0.9% of net advances in the June 2010 quarter compared to the same quarter last year. This is much higher than Bank of Baroda's 0.4% growth in NPAs. However, the bank has managed to keep it below 1% for the past eight quarters. Very few Indian banks have achieved this. Moreover, its provision coverage is in excess of the minimum 70% stipulated by the Reserve Bank of India. This means that the bank will not have to keep aside more provisions in the coming quarters.

   Another interesting feature of the bank's fundamentals is its net interest margin (NIM), which was 3% in the quarter ended June 30, 2010. NIM is a measure of spread between the cost of borrowing and yield on loans. This was the highest the bank has achieved in the past six quarters. While Indian banks operate at an average return on assets (RoA) of around 1%, UBI reported 1.3% RoA in FY10. This shows the bank's ability to milk its assets more efficiently than most other banks.

VALUATION:

At a price-to-book value (P/BV) of 1.7, UBI's stock is trading at its all-time high valuations. Still, it is trading at a lower valuation compared to its peers, such as Punjab National Bank and Bank of Baroda, which are quoting at an average P/BV of 1.8. The stock is therefore relatively cheap.The stock has outperformed the Sensex consistently over the past two months. This shows that investors' interest has increased recently in the bank's stocks. Moreover, the bank has posted a high growth in advances coupled with a higher RoA in the June quarter. This combined with a better asset quality will allow the bank to grow its net profit at a higher rate in the coming quarters. Thus the current valuations do not fully discount the bank's growth potential. Investors can consider this stock for the long term.