Union Bank Of India | Bank Of India – Are They Good To Buy?

The RBI’s move of reversing the interest rate has been a booster to the banking stock which has moved northward. However, in the past couple of weeks the banking players have witnessed some profit booking as it was clouded by issues like the Basel III norms and the inflation numbers which moved higher, thus giving little room for the RBI to cut the rate going ahead.

For the March 2012 quarter the banks faced headwinds when it came to the maintenance of margins as well as on the asset quality front. The public sector banks also posted less growth as compared to the private sector banks, except SBI which will be declaring its results on May 18, 2012. However, banks like the Union bank of India (UBI) and Bank of India (BOI) posted robust bottomline growth on the back of lower operating expenses.

To reiterate, the UBI and BOI posted the worst September quarter numbers of 2011. Both the banks faced serious headwinds on their asset quality front which deteriorated dramatically. For the September quarter of 2011, UBI’s net NPA increased by 72 basis points to 2.04 per cent while BOI’s net NPA increased by 71 basis points to 1.98 per cent on a sequential basis. One of the reasons was the shift from a manual to system-based NPA classification. However, when we look at the March quarter results, both the banks have performed decently and have tried to bring down their NPAs to lower levels. Let us look at both the banks’ March quarter results which will help us to understand them better.

Union Bank of India (UBI)

UBI posted a good set of March quarter numbers. The net interest income of the bank increased by 9.31 per cent to Rs 1,877 crore while the net profit grew by 29 per cent to Rs 773 crore. The bank’s major concern was on the asset quality front but it showed good improvement on the same. From the net NPA level of 2.04 per cent in the September quarter the bank has shown gradual improvement through two quarters and is now at 1.7 per cent. However, its net interest margin (NIM) was under pressure, which declined by 18 basis points to 3.26 per cent on a YoY basis while it saw a decline of 5 basis points on a sequential basis. The business of the bank grew at a decent pace with advances growing by 18 per cent while the deposits increased by 10 per cent.

Bank of India (BOI)

BOI posted robust March quarter numbers which gained investors’ attention. The net interest income (NII) increased by 8.39 per cent to Rs 2,501 crore while the net profit of the bank increased substantially by 93 per cent to Rs 459 crore. Even after making higher provisions, this increased by 49 per cent to Rs 1,061 crore and the bank was able to post a good bottomline. The asset quality as well the margins of the bank improved further on a sequential basis. From the NPA level of 1.98 per cent in the September quarter, the bank has shown gradual improvement through two quarters and is now at 1.47 per cent. The net NPA increased by 56 basis points on a YoY basis but declined by 31 basis points on a sequential basis. The net interest margin stood at 2.86 per cent, decreased by 8 basis points on a YoY basis while it increased by 31 basis points on a sequential basis. The advances of the bank grew by 16 per cent while the deposits grew by 6 per cent on a YoY basis.

Conclusion

Both the banks have very low provision coverage ratio and there might be further risk of asset quality deterioration. Both banks have shown decent growth on the credit front but there may be issues when it comes to deposit growth. On the other hand, with the interest rate reversal the banks’ NIM will improve and this will boost the profitability. We believe that both the banks are available at a fair valuation with UBI available at a price to book value (P/BV) of around 0.75 and BOI available at 0.94 times. Further, BOI has an edge over UBI as it has shown improvement in its margins. The worst is almost discounted in the scrip and therefore the potential downside could be limited. Therefore, one should invest in the scrip in a staggering manner to garner better returns.