United Bank Of India: Gross NPA Cross Double Digit Mark

With economy witnessing a slower growth the impact was not only seen on the advances front but also on the recoveries front. While the advances growth was contracting, the current economic situation in India resulted in more number of assets turning bad. While most of the private banks have managed to content the NPAs, the public sector banks have failed to address the issue.

The worst affected in the PSU lot is United Bank. There are quite a few issues the bank is facing on the operational performance front and if we take a look at the financial performance also, there are few issues which need a deeper analysis.

First and the foremost factor is that the Bank has made hefty losses in bottomline for the preceding two quarters. To put the figures in perspective, for the December 2013 quarter the losses stood at Rs 1238 crore after showing losses of Rs 489 crore in September 2013 quarter.

If we take a superficial look at the performance of the bank for the quarter ended December 2013, the various data points suggest that the situation has rather improved. The net interest margins for the bank improved to 2.65% from the levels of 1.8% in preceding quarter, whereas yield on advances and yield on investments improved on YoY basis.

However what makes us concerned about the bank is the rising NPA levels. On account of consistent increase in slippages, the gross NPAs as on 31 December stand at 10.82%. Noticeable factor is, there has been consistent increase in the Gross NPAs since September 2012 quarter. From just 3.88% in September 2012 it has increased to 10.82 % in December 2013. Apart from that, despite higher provisioning the Net NPAs have also increased significantly. Just to quantify provisioning for 9MFY14, it stands at Rs 3201.61 crore from the levels of Rs 1178.47 crore in 9MFY13.

Second concern is the capital adequacy of the bank is under question now. As of 31st December 2013 the CRAR of the Bank as on Basel II norms stands at 9.93%. Here the Tier I ratio is 6.12% and Tier II is 3.81%. However as the bank has to meet the RBI guidelines of Basel III in March 2014, there arises a question mark. AS per Basel III the CRAR is only 9.01%. The Tier I is only 5.59% and Tier II is 3.42%. With even March quarter not expected to bring any cheers for the United Bank, we have doubts about the bank complying to the RBI norms of more than 6% Tier I requirement by March 2014.

As for the solution, there is an instant need of capitalisation for the Bank. Government may capitalise the bank in near future. However what we feel is, it is again a complete misuse of Tax payer’s money, especially when the Government finance itself is under stress.

What we suggest is, Government should ask for a strategy to recover from these levels and should release the funds as the steps in the recovery strategy are achieved.

While this is on the Government part, we recommend the investors to avoid the stock in the near future. Again there are voices suggesting that the worst is over for the bank and the only way is northwards. However we feel the fate of the bank clearly depends on whether the Government provides capital funding. Till then, prudent strategy would be to avoid the counter.