Result highlights
- Albeit at Rs194.2 crore the Q2FY2007 net profit of Union Bank of India (UBI) is in line with our expectations, the bank''s second quarter results are weaker at the operational level.
- During the quarter the bank''s net interest income (NII) grew by 4.2% year on year (yoy) to Rs627.2 crore compared with our expectations of a 10% year-on-year (y-o-y) growth. The lower growth could be attributed to a squeeze on the net interest margin (NIM).
- The other income (excluding the treasury income) grew by 42.6% driven by a strong growth in the fee income and higher recoveries.
- The operating expenses grew by a sedate 1.4% as during the same quarter last year UBI had spent heavily on technology and expansion of its automated teller machine (ATM) network.
- As a result, the operating profit grew by a strong 19.9% year on year (yoy) to Rs428.3 crore. The operating profit excluding the treasury income grew by 20.2% yoy.
- Due to the lower provisioning requirement the bank could report a 217.8% y-o-y jump in its profits. In Q2FY2006 the bank had a one-time extraordinary provision of Rs235 crore that had pulled down its profits in that quarter.
- At the current market price of Rs127, the stock is quoting at 5.7x its FY2008E earnings per share (EPS), 3.0x pre-provision profits (PPP) and 1.1x book value. The bank is available at attractive valuations looking at its strong average return on equity (RoE), which is estimated to be 18.2% over FY2006-08E. We reiterate our Buy call on the stock with price target of Rs150.
Shareholding pattern 
Asset quality improves
The net NPAs reduced to 1.24% of the net advance at the end of September 2006 from 1.37% at the end of September 2005. However, on a sequential basis the same has gone up by two basis points from 1.22% at the end of June 2006.
Valuation and view
At the current market price of Rs127, the stock is quoting at 5.7x its FY2008E EPS, 3.0x PPP and 1.1x book value. We believe that although UBI''s Q2FY2007 NII has been less than our estimates, the same has been made up by higher-than-expected fee and other income.
The bank is available at attractive valuations looking at its strong average RoE, which is estimated to be 18.2% over FY2006-08E. We keep our earnings estimates unchanged and reiterate a Buy on the stock with price target of Rs150.