Stock Review: United Bank of India

 

Better asset quality and current and savings account ratio have added gloss to United Bank of India's earnings. Government's likely capital infusion by the end of this month will only add to the shine

 

PUBLIC sector lender United Bank of India reported robust financial performance in April-December 2010 on the back of improving asset quality and good current and savings account (CASA) ratio. The bank's net nonperforming asset (NPA) has improved by 30 basis points over the past three quarters. The stock also looks attractive as the share of low-cost CASA in its total deposits has improved by almost 600 basis points over the trailing 12-month period ending December. The Kolkata based bank expects the government to infuse capital by the end of this month which will shore up its capital adequacy ratio.

BUSINESS:

United Bank of India has a network of around 1,600 branches, two-thirds of which are in the eastern region. Besides Kolkata, the bank has corporate finance branches in New Delhi and Mumbai.

FINANCIALS:

United Bank's April-December 2010 net profit grew 38% year-on-year. Net interest income, which is the difference between interest earned and interest expense, increased 64.5%. Provisions for bad loans, which have more than doubled from a year ago, weighed on net profit during the nine months.

   The bank's net non-performing assets were at 1.5% of net advances as on December, down from 1.8% in January-March quarter of 2010, but still higher than 1.3% a year ago. Its provision coverage ratio was at 71.2% as on December, better than the mandatory minimum requirement of 70%.

   United Bank's net interest margin, or the interest rate differential between lending and borrowing, has increased to 3.2% from 2.1% a year ago. The bank has maintained NIM above 3% over the past three quarters.

   The state-run lender's advances were up 19% year-on-year as on December 31 driven by retail advances, which moved up 34%. Housing and auto loans formed nearly 80% of the bank's retail portfolio.

GROWTH DRIVERS:

One of the key growth drivers for the bank is its lower cost of deposits vis-à-vis some peers. The bank has managed to reduce cost of deposits by 50 basis points year-on-year to 5.5% as of December helped by higher share of CASA deposits, which forms 40% of total deposits against 30% of peers such as Andhra Bank.

   For banks such as United Bank, with significant exposure to rate-sensitive home and auto loans, a good CASA helps withstand the pressure from rising interest rates. High CASA ratio enables the bank to absorb the increase in overall costs of borrowing, without hiking the rates for borrowers.

   The bank's credit-to-deposit (CD) ratio at 69% is even lower than larger peers such as the State Bank of India and Punjab National Bank. It expects the government to infuse around Rs 308 crore by the end of this month that will boost capital adequacy.

VALUATION:

The bank's stock is trading at price-to-book value of 1 compared with its peers such as Andhra Bank and Bank of Maharashtra that are trading at price-to-book values of 1.2 and 0.9, respectively. The bank's dividend yield stood at 3% in FY10.

   The bank has seen a rise in foreign institutional holding by 240 basis points to 5% as on December, a sign of enhanced investor confidence. While the high interest rate regime does pose a concern for the sector in general, United Bank's growth prospects outweigh near-term woes and investors having a long-term view are advised to consider the stock.