Union Bank of India (BOM:532477)

TOP CONTRIBUTORS

Rahul Ginodia

Geoffrey Jordan

Union Bank of India (BSE: 532174) is a large public sector bank in India.^[1] It is also the sixth largest among the Indian public banks with an asset base of Rs. 1,610 billion.^[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 of March 2009. Similarly, return on equity stood at 24.79% against its peers’ average of 22.04%.^[6]

Company Overview

The various types of deposits offered by Union Bank of India include savings bank deposits, current deposits, current and savings account (CASA) deposits, and term deposits. Its advances portfolio includes large corporate advances; micro, small and medium enterprises advances; agriculture advances, and retail advances. Its retail advances include home loan, vehicle loan, education and other retail loans. Its investment portfolio includes investments made in government securities, state development loans and other approved securities. It holds a 51% interest in Union KBC Asset Management Company Pvt. Ltd. As of March 31, 2010, it operated 2,805 branches and 2,327 automated teller machines.^[7] The total outlets, including extension counters and services branches, stood at 2,910 as of March 31, 2010.^[7]

Business and Financial Metrics

First Quarter 2010 Results (ended June 30, 2010)^[8]

Union Bank of India reported a growth of 36% in net profit for the first quarter to Rs 601.42 crore. The bank posted a net profit of Rs 442.19 crore for the corresponding quarter of the last fiscal year. The bank also reported an increase of 11.25% in total income for the first quarter to Rs 4,120.66 crore against Rs 3,704 crore during the year-ago period. Union Bank's gross non-performing assets increased to 2.19% during the quarter from 1.95% in the same quarter a year ago. The bank's revenue from its retail banking operations during the first quarter of the fiscal stood at Rs 1,315.36 crore, up 13.22% over Rs 1,161.75 crore in the same period of the last fiscal. Its revenue from the corporate banking segment during the quarter increased by 17.63% to Rs 1,690.60 crore, compared to Rs 1,437.23 crore in the year-ago period.

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 of 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.^[10] 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.^[11] Union Bank is one of the few banks which has a Net Interest Margin (NIM) of over 3% (it signifies efficiency in the core banking business) and as of 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 a 33.55% increase in deposits and 29.50% growth in advances.^[13] The bank has steadily grown its asset base over the last 5 years at a compound annual growth rate (CAGR) of 22.10%, aided by strong growth in deposits. In FY2009, the bank’s total deposits stood at Rs. 1,384.16 billion, representing growth of 33.28% compared to Rs. 1,038.59 billion a year ago,^[13] 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, but 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).^[14]

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.^[15] However the bank’s staff expenses increased by 36.34% due to arrears payments and pension provisions during the year.^[16]

In order to secure its future capital risk, during 2008-09, the bank 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 of March 2009, compared to its peers’ average of 13.66%.^[11][17]

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% .^[18]

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.^[19]

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^[20] – comprising of 65.61% - Housing, 10.02 – Autos, 9.76% - Education, 3.03% - Personal, 11.58-others. .^[21] During 20089-09, the Bank's depositors account increased by 4.10 million to reach a total deposit clientele of 23.60 million as of 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.^[22]

Share Holding Pattern

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 bank growth is outpacing the industry average. The year-over-year growth in loan portfolios of Union Bank of India was reported at 30.4% during March 2009, 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% in 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 of 3.24%, which is 39 bps higher than its peers’ average, aided by lowest cost of funds in the industry at 6.35%.^[24]

Government banks are managing their Non-Performing Assets (NPAs) proactively

With rising defaults due to a slow economy, government 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 a fall in gross NPA proportion. The Oriental Bank of Commerce has seen the sharpest decline in gross NPA (a fall of 78 bps to 1.53%).^[25] However, during 2008-09, the Union Bank of India proactively restructured its loan portfolio to 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% in 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. This has helped them monitor accounts and restrict NPAs to low levels. Union Bank of India decentralized the credit management system to ensure effective monitoring.^[26]

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-lines, 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 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.^[27] 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.^[28] Besides personal and corporate banking, SBI is also involved in NRI (Non Resident Indian) services through its network in India and overseas.

• Punjab National Bank: Punjab National Bank is the largest nationalized bank currently serving 3.5 crores customers.^[29] Punjab National Bank has been ranked 38th amongst top 500 companies by The Economic Times. PNB has earned 9th position among the top 50 trusted brands in India.

• Bank of India (BANKINDIA.EQ-IN): Bank of India 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 India.

• HDFC Bank: The Housing Development Finance Corporation (HDFC) Bank Limited (HDFCBANK.EQ-IN) is the second largest private sector bank in India by net profit.

^[30] 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,^[31]the bank is the largest private sector bank in terms of branch network in India.

• Axis Bank: is India's third-largest private-sector bank after the significantly larger ICICI Bank, and HDFC Bank.

^[32]

References

1. ↑ Money Control
2. ↑ Silver Scorpio - Brickworks rating
3. ↑ the Hindu Business
4. ↑ Financial Express – Brickwork ratings
5. ↑ Brickwork Ratings Assigns
6. ↑ Financial Express – Brickwork ratings
7. ↑ ^{7.0 7.1} Reuters: Union Bank of India Company Profile
8. ↑ Sify Finance: "Union Bank of India Q1 net profit up 36%" July 26, 2010
9. ↑ Segementwise Annual Report – 2009, Page 1
10. ↑ Analyst Meet for the year ended March, 2009, Slide 11
11. ↑ ^{11.0 11.1} Financial Express - Brickwork Ratings
12. ↑ Analyst Meet for the year ended March, 2009, Slide 26
13. ↑ ^{13.0 13.1} Analyst Meet for the year ended March, 2009, Slide 2
14. ↑ Business Wire India - Brickwork Ratings
15. ↑ Analyst Meet for the year ended March, 2009, Slide 8
16. ↑ Analyst Meet for the year ended March, 2009, Slide 13
17. ↑ Outlook India - Brickwork Ratings Assigns “BWR AAA”
18. ↑ Union Bank of India - Segment Results - Page No-2
19. ↑ Analyst Meet for the year ended March, 2009, Slide 52
20. ↑ Analyst Meet for the year ended March, 2009, Slide 24
21. ↑ Analyst Meet for the year ended March, 2009, Slide 28
22. ↑ Brickwork Ratings Assigns
23. ↑ Analyst Meet for the year ended March, 2009, Slide 47
24. ↑ rupees Times
25. ↑ The Business Line - NPAs of pvt banks rise, public sector banks witness decline
26. ↑ Analyst Meet for the year ended March, 2009, Slide 34
27. ↑ Economic Times
28. ↑ SBI Website
29. ↑ Finance IndiaMart PNB
30. ↑ Insight 2nd Jan 2009.pdf Market Insight, 2nd Jan 2009, page 4
31. ↑ HDFC Bank website
32. ↑ Livemint HDFC Bank pips ICICI in terms of branch network