Union Bank – Margins expand sharply

Union Bank of India’s 4Q10 was a strong earnings show – profits were up 28% yoy (17% above our estimates), driven by sharp NIM expansion and healthy fee growth. Core operating profits (pre-provisioning profits ex trading gains) were also robust (+65% yoy). The balance sheet, however, was mixed – NPLs increased sharply, coverage levels were down, but there were improvements in funding mix and credit growth (+23% yoy). Overall, the strong NIM jump seems to have offset the pressure on asset quality; but only for now.

Union’s 67bps qoq NIM expansion (339bps now) was the highlight of the quarter (vs. flat qoq for industry) – and was well ahead of our (and management) expectations. Management guides to over 300bps NIMs in FY11E, after absorbing ~15bps NIM impact from higher savings interest outgo. Core fee income growth sustained at 30% yoy – though linked to balance sheet growth. Operating expenses increased 20% qoq as management provided (~Rs1bn in 4Q) for an upcoming pension charge (Rs12bn estimated, but likely spread over 5yrs).

UBI’s fresh slippages increased to 3% (annualized); management maintains a cautious outlook; and strong fee income growth trends. Management expects capital infusion by H1FY11.

UBI EPS Estimates for FY 11 and FY 12:
Kotak – 45 and 57 with a target of 380
Goldman Sachs – 50 and 61 with target of 335
Citi – 46 and 53 with target of 275 [Well, that’s very conservative]
BNP Paribas – 36 and 48 [ with a target of 350] Acknowledges the below consensus expectations of EPS
HDFC Sec- 42 and 52 with target of Rs 304