In Expansion Mode - United Bank of India

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It might come as a surprise to investors to see here our choice of United Bank of India (UBIL) as a low-priced scrip recommendation, especially since we have been advising our readers to stay away from interest rate-sensitive counters. However, there are certain specific reasons that have driven us to pick out UBIL. It is among the few counters which still trades above its issue price after its IPO in 2010. Further, apart from belonging to the government stable, the other compelling factors include better business growth, improving net interest margins, better branch expansion plans, and a good dividend payment history with current dividend yield standing at 2.10 per cent.

On the valuation front, the scrip is placed well with its trailing four-quarter earnings discounting the current market price of Rs 94 by 6.50 times. This is in line with its peers like Dena Bank and UCO Bank. Also, the adjusted price-to-book value of 1.18 times seems to be placed well as against 1.50 times of Dena Bank and 1.70 times of UCO Bank. Therefore our recommendation is that you should buy this scrip at its current levels. UBIL posted good business growth in Q3FY11 which can be seen from the fact that the total business of the bank stood at Rs 1,23,785 crore, showing an increase of 7 per cent on a QoQ basis and 14.30 per cent on a YoY basis.

Its total deposits increased by 11.20 per cent on a YoY basis to reach Rs 73,106 crore and advances showed a growth of 19.10 per cent on a YoY basis to reach Rs 50,679 crore. The best part was that due to the addition of 34 new branches, the low-cost CASA deposits increased significantly by around 30 per cent, contributing more than 40 per cent to the total deposits.

In FY11 it announced the addition of 57 branches, 34 of which have been added till 9MFY11. In terms of advances, the growth curve has been in line with the industry. But the positive factor here is that it has a lower exposure to high-risk retail loans which constitute only 13 per cent of its loan portfolio. Further, housing and auto loans form only 5.32 per cent of its total loan structure. For 9MFY11 the yield on advances has also increased to 10.23 per cent from 9.46 per cent in 9MFY10.

With the decline in cost of funds and improvement in yield the NIM for 9MFY11 increased to 3.20 per cent from 2.24 per cent in 9MFY10. On the asset quality front, the efforts taken by the bank since the last two quarters are paying off and the net NPAs as on December 31, 2010 have declined to 1.52 per cent from 1.58 per cent as on September 30, 2010. However, some improvement is necessary on this front.

On the financial front, despite a decline in the treasury income for 9MFY11, UBIL posted bottomline of Rs 380.74 crore as against Rs 275.97 crore in 9MFY10. With the increasing branch network, improving margins, and asset quality, the performance is expected to get better.