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Investors with a one year-plus horizon can consider buying the stock of Union Bank of India.

Investments can be staggered, given that the markets seem to be in corrective mode.

The bank has witnessed better-than-industry advances growth which helped boost earnings over the past few quarters. High return ratios, comfortable provision coverage, a strong CBS-enabled branch network and good operating efficiencies are Union Bank’s key differentiators.

At the current market price of Rs 215, the stock is trading at a trailing one year price earnings multiple of 6.3 and at 1.55 times its FY09 book value.

Union Bank’s net profit and advances grew by 24 per cent and 22 per cent respectively during the period 2005-08 on a compounded annual basis.

Despite the fall in net profit in the fourth quarter, the bank delivered a profit growth of 24 per cent for the year ended 2008-09, aided by a 29-per cent growth in advances and core fee income. Higher operating expenses (39-per cent rise) owing to branch expansion, employee provision and recruitment dragged profits down. The net interest margin of the bank improved to 3.24 per cent for the year, from 2.93 per cent.

The proportion of low-cost deposits has come down to 30.1 per cent, but may improve as more branches are rolled out. The credit-deposit ratio fell to 73.2 per cent due to a high 33-per cent deposit growth. Though a high proportion of deposits are locked in at higher rates, pressure on margins may be contained by the bank’s strong advances and core fee income growth.

Union Bank’s gross NPA ratio fell from 2.18 per cent in FY08 to 1.96 per cent FY09. The fall is due to restructuring of advances worth Rs 2,958 crore. The net NPA ratio stood at 0.34 per cent, with a provision cover of 83 per cent. High provisioning coverage will cushion it from future credit losses.

The Government of India’s undiluted stake in the bank is 55.4 per cent which constrains the bank in terms of raising capital. The bank has a comfortable capital adequacy ratio of 13.3 per cent (Basel II) and has enough headroom to maintain its capital adequacy requirement in short term (it is planning to come up with Rs 1,700 crore debt issue).

Union Bank may be one of the beneficiaries of the recapitalisation package proposed by the government. The bank has recently entered into insurance business which may boost its ‘other income’ as it can leverage on its customer base to cross sell.

M.V.S Santosh Kumar

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