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WIKI ANALYSIS
Union bank of India (BSE: 532174), a public sector bank, is the most modern among public sector banks (the first large Public Sector Bank in the country to have achieved 100% core banking solution (CBS) roll out)[1]. It is also the sixth largest among public bank with an asset base of Rs. 1,610 billion as on 31st March 2009 and is based in western India.[2] From 2006 to 2009, the bank managed to open an additional 500 branches, far outpacing the 72 branches opened from 1996 to 2006.[3] In FY 09, the Bank began offering anywhere banking services to all of its branches, also known as core banking solutions (CBS). With 100% CBS branches, the Bank managed to increase its total business (sum of deposits and advances) by 31.84%, to reach Rs. 2,390 billion compared to Rs. 1,797 billion in FY08. [4] The bank had net interest margin of 3.24% which is 39 bps higher than its peers’ average, aided by lowest cost of funds in the industry at 6.35%.[5]. With the continuous competition from private and other PSU Banks, Union Bank of India has been focusing on increasing other income streams like Insurance, Mutual Fund and wealth management services.
During FY09, the Bank enhanced its profitability by focusing on high yielding loan portfolio - retail, MSME (Medium, Small and Micro Enterprises) and agriculture credit, and reduced its exposure on low yielding advances. As a result, its return on assets stood at 1.27% which was well above its peers’ average of 1.10% as on 31st March 2009. Similarly, return on equity stood at 24.79% against its peers’ average of 22.04%.[6]
Corporate Overview
Union Bank of India was inaugurated by Mahatma Gandhi, on November 11, 1919 and started its operations in 1920.[7]. It was only from 1960 onwards that the bank's growth phase began and it aligned its activities in line with national priorities. In the context of the foreign exchange crisis faced by the country in the late 50s and early 60s, the bank geared itself to assist the export sector and push its foreign exchange business with an added emphasis. After nationalization in 1975, Belgaum bank Ltd., a private sector bank was merged with Union Bank of India. In 1985, Miraj State Bank Ltd., a private sector bank and in 1999 the Sikkim bank Ltd. were merged with the bank. The Bank came out with its Initial Public Offer (IPO) in August 20, 2002 and followed on the Public Offer in February 2006. In the last decade, the bank extended financial support to developing segments like educational, housing and trade sectors.[8]
As on June 2009, the bank had 2600 branches[9] comprising total of 762- Rural areas, 564 – metro cities, 607 Urban areas and 625- Semi urban areas.[10]
Business and Financial Metrics
| Metric (in Billions INR) | 2005 | 2006 | 2007 | 2008 | 2009 |
| Total Interest Income | 49.70 | 58.64 | 73.82 | 94.47 | 118.89 |
| Non - Interest Income | 7.66 | 6.25 | 8.42 | 12.33 | 14.83 |
| Total Revenue | 57.36 | 64.89 | 82.24 | 106.80 | 133.72 |
| Cost Income ratio | 48.90% | 42.40% | 42.50% | 38.17% | 41.81% |
| Net Profit | 7.1906 | 6.75 | 8.45 | 13.87 | 17.27 |
| Credit - Deposit Ratio | 61.87% | 68.78% | 72.68% | 72.33% | 70.45% |
| Net NPA's(%) | 2.61% | 1.60% | 1.0% | 0.15% | 0.34% |
| Return on Average Assets (%) | 1.10% | 0.80% | 0.90% | 1.26% | 1.27% |
| Total Assets | 724.13 | 891.26 | 1,026.78 | 1,240.73 | 1,609.76 |
In FY2009, Union Bank of India earned a total revenue of Rs. 133.72 billion, a 25.20% rise compared to Rs. 106.80 billion in 2008. This was largely driven by strong growth in its total interest income at 25%, whereas non-interest income registered a growth of over 20.25%. Fee based Income grew by 29.22% mainly due to the new stream of income from Syndication of loans, Wealth Management Services and Channel Financing.[12] Despite an increase in NPA to 0.35% from 0.17%, the bank still has the lowest Non-Performing Assets (NPAs) among its top peers[13]. Union Bank is one of the few banks which has a Net Interest Margin (NIM) of over 3% (it signifies efficiency in core banking business) and as on March, 2009, NIM was 3.24%, an increase of 31bps from 2.93% in 2008.
Total Business of the bank increased to Rs. 2,369.68 billion in 2009 from Rs. 1,797.37 billion in 2008, propelled by 33.55% increase in deposits and 29.50% growth in advances.[15] The bank has steadily grown its asset base over the last 5 years at a CAGR of 22.10%, aided by strong growth in deposits. As on FY2009, the bank’s total deposits stood at Rs. 1,384.16 billion - a growth of 33.28% compared to Rs. 1,038.59 billion a year ago[15], and the bank is largely funded through term deposits. The Bank’s current account and savings account deposits increased from Rs. 362.04 billion in FY08 to Rs. 417.11 billion in FY09, growth was much slower at 15.2%, leading to a 479-bps decline in the ratio (from 34.86% in FY08 to 30.07% in FY09).[16]
In FY2009, the company posted a consolidated net profit of Rs. 17.27 billion, up from Rs. 13.87 billion in FY2008 driven by significant growth in fee income and strong advances growth[17]. However the Bank’s Staff expenses increased by 36.34% due to arrear payments and pension provisions during the year, which was much higher than a decrease in same by 3.50% in FY08.[18]
In order to secure its future capital risk, During 2008-09, the bank has started building up Tier I capital by issuing Rs. 2 billion perpetual bonds to augment capital funds. As a result, the bank’s capital adequacy ratio stood at 13.27% as on March, 2009, as against the peers’ average of 13.66% .[13][19]
Business Segments
Wholesale Banking (40.35% of Revenues, 23.51% of Operating Profit)
Wholesale Business banking has been Union Bank of India's perennial strong point, accounting for 40.35% of total FY2009 revenue. During 2008-09, total revenue increased over 35.50% to Rs. 53.96 billion from Rs. 39.82 billion in FY2008. Operating Profit followed a similar trend and grew about 35.5% y-o-y to Rs. 5.51 billion during 2008-09. Corporate Advances witnessed the highest growth of 35.95%, followed by Medium, Small and micro enterprises of 31.91%, Agricultural Loan – 17.84% .[20]
During 2008-09, The Bank implemented Loan Automation Solution for its Retail, MSME and Corporate asset portfolios. This facilitates significant streamlining of Turn-around-Time (TAT) in sanctioning of credit facilities, enhances customer experience and supports key requirements like Monitoring and MIS.[21]
Retail Banking (32.58% of Revenues, 57.43% of Operating Profit)
Retail banking is the field where the Bank has been focusing by leveraging its developed technology and during the year 2008-09 it made all of its branches CBS. With more than 2600 Branches, over 1,790 ATMs and more than 33 million customers the company is able to attract, retain and deepen customer relationships through a wide range of banking products and services. The Bank’s retail banking segment earned Rs. 13.47 billion as operating profit on revenue of Rs. 53.96 billion, which increased by 75.13% and 25.75% respectively during 2008-2009. During 2008-09, the Bank’s Retail loan portfolio increased to Rs.100.92 billion (10.26% of total loan portfolio), from Rs. 78.36 billion[22] – comprising of 65.61% - Housing, 10.02 – Autos, 9.76% - Education, 3.03% - Personal, 11.58-others. .[23] During 20089-09, the Bank's depositors account increased by 4.10 million to reach a total deposit clientele of 23.60 million as on 31st March 2009.
Treasury Income (25.63% of Revenues, 38.35% of Operating Profit)
Treasury income increased by around 20% from Rs. 28.56 billion in FY2008, to Rs. 34.27 billion in FY2009 and constituting 25.63% of the Bank’s total revenue. Operating income rose by 25% y-o-y to Rs. 8.99 billion in FY2009. The Bank has a well defined treasury operations and risk management system. It has been trying to optimize its investment decisions based on internal risk - return trade-off and the board’s risk management guidelines. As a result, the Bank’s yield on investments has increased to 7.24% during FY09, from 6.96% for the same period a year ago.[24]
Share Holding Pattern
| Union Bank of India holding pattern
(as on March 31, 2009)[25] | |
| Entity | Percentage |
|---|---|
| Govt of India | 55.43% |
| Indian Financial Institutions | 15.92% |
| Public and others | 14.53% |
| Foreign Institutional Investors | 14.12% |
Key Trends and Forces
Mid-sized Public sector banks(PSUs) are outperforming the banking industry even in slowdown
Despite the slowdown hitting the economy, mid-sized PSU banks growth are outpacing the industry average. The year on year growth in loan portfolios of Union Bank of India was reported at 30.4% during the March quarter, compared to Bank of India and Bank of Baroda at 26.1% and 36.60% respectively. Also Union Bank of India had one of the lowest Non-Performing Assets (NPAs) in the industry at 0.35% compared to other mid-sized banks (Bank of Baroda – 0.44% and Bank of India – 0.31%) largely due to prudent risk management technology. The Bank’s return on assets stood at 1.27%, well above its peers’ average of 1.10% as on 31st March 2009. The most important ratio net interest margin, which measures the efficiency of Banks in managing their core business, outperformed the industry average. Union Bank of India had NIM at 3.24%, which is 39 bps higher than its peers’ average, aided by lowest cost of funds in the industry at 6.35%.[26]
Government banks are managing their Non-Performing Assets (NPAs) proactively
With rising defaults due to a slow economy, Govt. banks have stepped up their NPA management. PSU banks have been closely monitoring their loan books and restructuring them to prevent their NPA from going out of control. In 2008-09, some of the largest private banks have seen their gross non-performing assets as a proportion to their gross advances going up by 21-100 basis points largely due to higher exposure to retail lending. ICICI Bank has seen the sharpest increase in its gross non-performing asset (GNPA) proportion, more than one percentage point to 4.33%. In contrast to the rising trend in private banks’ NPAs, leading government-owned banks in fact showed fall in gross NPA proportion. The Oriental Bank of Commerce has seen the sharpest decline in gross NPA (fall of 78 bps to 1.53%)[27]. However, during 2008-09, the Union Bank of India proactively restructured its loan portfolio to the extent of Rs. 29.59 billion. Union Bank of India’s overall NPAs are much lower than the industry’s. As of March 2009, the bank had Net NPAs of 0.34%, up by 19bps from 0.15% as on March 2008. A higher exposure to corporate credit and more conservative lending during a booming economy may have aided lower NPAs for some of these banks. Under the competent guidance of the RBI, these banks have decentralized their credit and recovery team. This has helped them in proper monitoring of accounts and restricting NPAs to low levels. Union Bank of India on its part had decentralized the credit management system to ensure efficiency and effective monitoring.[28]
Rationalization of cost aiding higher Profitability for PSU Banks
Banks generate a ‘spread’ by accepting deposits and lending advances. In currency terms this is measured by net interest income (NII), which is the difference between interest earned and interest expended. It is surprising to note that there was no relation between the growth rate in NII, and net profit of PSU banks over the past five years . The growth in net profit of PSU banks was more than 20% in the past two fiscal years, while the growth in NII was less than 10%. However, in order to grow their bottom-line, PSU banks have started controlling their cost structures which has resulted in a lower cost-to-income ratio and higher profit growth.The Union Bank of India registered a 24.48% growth in its net profit, and its cost to income ratio has improved significantly from 48.9% in FY2005, to 41.81% in FY2009.[29]While Comparatively, the net profits of State Bank of India (SBI) and Bank of Baroda registered growth rates of 35.50% and 55% respectively due to their control over cost.
Competition
- State Bank of India (SBI-BY) : State Bank of India (BSE:SBI), a public sector bank, is the largest bank in India.[30]. Besides personal and corporate banking, SBI is also involved in NRI (Non Resident Indian) services through its network in India and overseas. As of May 2008, the bank had 21 subsidiaries and 10,186 branches.The Bank has posted a Net Profit of Rs. 6729 Crores for 2007-08 as compared to Rs.4541Crores in 2006-07, registering a growth of 48.18%.[31]
- Punjab National Bank : Punjab National Bank with 4497 offices is the largest nationalized bank currently serving 3.5 Crores customers[32].Punjab National Bank has been ranked 38th amongst top 500 companies by The Economic Times. PNB has earned 9th position among top 50 trusted brands in India.The bank posted a gross profit of Rs. 4006 Crores for 2007-08 as compared to Rs 3231 Crores in 2006-07, registering a growth of 24.6%. [33]
- Bank of India (BANKINDIA.EQ-IN): Bank of India, established on 7 September 1906 is a bank with headquarters in Mumbai. Government-owned since nationalization in 1969, It is one of India's leading banks, with about 2,884 branches including 27 branches outside IndiaThe bank posted a gross profit of Rs. 3701 Crores for 2007-08 as compared to Rs 2394 Crores in 2006-07, registering a growth of 54.59%.[34]
- HDFC Bank : The Housing Development Finance Corporation(HDFC) bank Limited (HDFCBANK.EQ-IN), the second largest private sector bank in India by net profit,[35] generated revenues of over Rs m 5228 Crores in 2007.[36]. Headquartered in Mumbai the bank is one of the first private banks to be set up in India. With a network reach of 1412 branches spread over 528 cities across India and having over 2890 ATMs across these cities,[37]the bank is the largest private sector bank in terms of branch network in India leaving behind ICICI bank.[38]
As on 31st March 2008, total advances was estimated at Rs. 21,815.50 billions. Union Bank of India with total advances of Rs. 758.78 billion had a market share of 3.41%.
| Metrics/Company (figures in Billions INR) | Union Bank of India | ICICI Bank | HDFC Bank | State Bank of India | Punjab National Bank | Bank of India | Bank of Baroda | Indian Bank | Canara Bank |
| Revenue Metrics | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Net Revenue (net of interest exp.) | 40.86 | 161.83 | 75.11 | 264.2 | 75.32 | 85.51 | 59.62 | 30.60 | 58.46 |
| Net Interest Income | 28.53 | 73.04 | 52.3 | 170.21 | 55.34 | 54.99 | 39.11 | 20.54 | 35.38 |
| Revenue Growth from 2007 | 29.87% | 45.18% | 50.70% | 12.43% | 8.49% | 70.92% | 20.21% | 19.08% | 5.50% |
| NIM | 2.93% | 2.20% | 4.40% | 3.07% | 3.58% | 2.97% | 2.90% | 3.45% | 2.42% |
| Opearating Metrics | |||||||||
| Net Income | 10.71 | 41.57 | 15.9 | 67.29 | 15.41 | 30.07 | 14.35 | 10.09 | 15.65 |
| Net Profit Margin | 12.99% | 25.69% | 21.17% | 25.47% | 20.46% | 35.17% | 24.07% | 32.98% | 26.77% |
| Total Operating Income | 25.80 | 72.43 | 37.65 | 138.11 | 40.06 | 54.57 | 30.27 | 16.59 | 29.59 |
| Other Key Industry Metrics | |||||||||
| Total Assets | 1095.78 | 3997.95 | 1332.51 | 5665.65 | 1990.48 | 1788.3 | 1795.99 | 705.08 | 1805.29 |
| capital Adequacy Ratio | 12.51% | 14.92% | 13.60% | 13.47% | 12.96% | 12.95% | 12.91% | 12.74% | 13.25% |
| Return on Assets | 1.26% | 1.10% | 1.32% | 1.01% | 1.15% | 1.25% | 0.89% | 1.64% | 0.92% |
| Net NPAs | 0.15% | 1.49% | 0.47% | 1.78% | 0.64% | 0.52% | 0.47% | 0.24% | 0.84% |
All figures are as on 31st March, 2008 as per the respective Company's annual report.
References
- ↑ Money Control
- ↑ Silver Scorpio - Brickworks rating
- ↑ the Hindu Business
- ↑ Financial Express – Brickwork ratings
- ↑ Brickwork Ratings Assigns
- ↑ Financial Express – Brickwork ratings
- ↑ Maps of India – Banks in India
- ↑ - Domain - b
- ↑ Indian Express - Union Bank to open 67 branches
- ↑ Analyst Meet for the year ended March, 2009, Slide 46
- ↑ Segementwise Annual Report – 2009, Page 1
- ↑ Analyst Meet for the year ended March, 2009, Slide 11
- ↑ 13.0 13.1 Financial Express - Brickwork Ratings
- ↑ Analyst Meet for the year ended March, 2009, Slide 26
- ↑ 15.0 15.1 Analyst Meet for the year ended March, 2009, Slide 2
- ↑ Business Wire India - Brickwork Ratings
- ↑ Analyst Meet for the year ended March, 2009, Slide 8
- ↑ Analyst Meet for the year ended March, 2009, Slide 13
- ↑ Outlook India - Brickwork Ratings Assigns “BWR AAA”
- ↑ Union Bank of India - Segment Results - Page No-2
- ↑ Analyst Meet for the year ended March, 2009, Slide 52
- ↑ Analyst Meet for the year ended March, 2009, Slide 24
- ↑ Analyst Meet for the year ended March, 2009, Slide 28
- ↑ Brickwork Ratings Assigns
- ↑ Analyst Meet for the year ended March, 2009, Slide 47
- ↑ rupees Times
- ↑ The Business Line - NPAs of pvt banks rise, public sector banks witness decline
- ↑ Analyst Meet for the year ended March, 2009, Slide 34
- ↑ Economic Times
- ↑ SBI Website
- ↑ Page 9, SBI Annual Report 2007-08
- ↑ Finance IndiaMart PNB
- ↑ Rediff Money PNB
- ↑ Rediff Money, Bank of India
- ↑ Insight 2nd Jan 2009.pdf Market Insight, 2nd Jan 2009, page 4
- ↑ Page 2, Annual report 2007-2008
- ↑ HDFC Bank website
- ↑ Livemint HDFC Bank pips ICICI in terms of branch network
- ↑ Profile of Banks Reserve Bank of India - A Profile of Banks : 2007-2008
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