Asset Quality Improves, UBI Shares Zooms 6%

The Union Bank of India (UBI), today, reported a good set of Q3FY13 numbers. For the Dec 2012 quarter, the Net Interest Income (NII) grew by 8.48% to Rs 1891 crore, while its profits sky-rocketed by 38% to Rs 302 crore on a YoY basis. A major positive from the result was an improvement in its asset quality, which helped the stock to move higher closing the day up by 6% to Rs 255.1 per share. The following are some of the key financial parameters of the bank:

The asset quality of the bank has seen a substantial improvement in the December quarter of 2012. Gross and Net NPA of the bank decreased by 30 and 36 basis points to 3.36% and 1.7% respectively on a sequential basis. Provision coverage ratio (PCR) of the bank also stood at 66.21%, slightly below the RBI guidance of maintaining it at 70%.

However, the UBI faced some headwinds when it came to Net Interest Margin (NIM) front. NIM of the bank decreased by 7 basis points to 2.95% on a sequential basis, while it declined by 25 basis points on a YoY basis.

As on Dec 31, 2012, the Capital Adequacy Ratio (CAR) as per Basel II norms of the bank stands at 10.78% and Tier I CAR of 7.4%. We believe the CAR of the bank is at a lower level; however, the government is expected to infuse capital in the bank in the coming months which would improve the overall CAR of the bank.

Overall, the bank posted a decent business growth. Global Advances of the bank grew by 21.64% to Rs 189997 crore, while deposits grew by 16.58% to Rs 239355 crore which is above the RBI projections of 15% and 13% of advances and deposits growth respectively for FY13.

We believe that the bank has seen an improvement in its performance. On the valuation front, the bank is currently available at a Price-to-book value of 0.9x, which we believe is fairly valued. We would advise our readers to invest in the counter in a staggering manner keeping in mind long term horizon to garner better returns.