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Suresh Krishnamurthy

Mr V. Leeladhar, Chairman and Managing Director, Union Bank of India... The jump in profits is predicated on a sharp rise in advances to the retail sector.

THOSE invested in Union Bank of India can hold on to the stock. Fresh investments can be considered in the event of a decline in price from present levels.

Gilt-edged show

Union Bank of India (UBI) has reported a 75 per cent growth in profits for the year ended March 2003.

The impressive rise comes on the back of a 100 per cent growth registered in the year ended March 2002. Along with the growth in profits, UBI has also been able to rein in the growth of bad loans. The balance-sheet sports a much more healthy picture now than it did a year back. A significant proportion of the rise in profits is attributable to profits from trading of government securities. Interestingly, there is noticeable improvement on the non-treasury banking operations business too. The cost-to-income ratio has been declining, although not substantially.

UBI's spreads are indeed under pressure — yield on advances are declining faster than the cost of deposits. A sharp fall in the proportion of low-cost demand deposits to total deposits in 2002-03 appears to be the culprit. However, the impact has been mitigated by a reduction in the proportion of operational expenses to interest income.

Importantly, UBI has been able to rein in the growth of non-performing assets. NPAs at the end of March 2003 are marginally lower than what it was at the end of March 2002. At the same time, customer assets have risen by 20 per cent. The result is a decline in the net NPA ratio to 4.66 per cent at end-March 2003 from 6.06 per cent at end-March 2002.

Investors can expect another year of improved performance in 2003-04. The treasury story is not over yet. The yield on investments for the year ended March 2003 was 10.21 per cent for Union Bank of India. In contrast, the yield on government securities is now below 6 per cent. This indicates the extent of unrealised gains on the banks' government securities portfolio. Such gains can contribute to profit growth in 2003-04.

Apart from contribution from trading, the jump in profits is predicated on a sharp rise in advances to the retail sector. UBI's housing finance disbursements have risen by 60 per cent in 2002-03. They are expected to rise significantly in 2003-04 too. Spreads in this business are relatively more attractive and are behind the robust profit growth expectations.

The Government debt buyback programme is also expected to generate profits of about Rs 100 crore for UBI. Overall, if provisions for bad loans do not rise, then the growth in after-tax profits would be even higher. Beyond March 2004, however, growth in profits is likely to be stretched; maybe even non-existent. Factors such as improvement in credit-offtake and interest rate trends will then determine profitability.

Buy at lower prices

UBI has declared a dividend per share of Rs 2.10. The dividend yield works out to more than 7 per cent. The low payout suggests that this level of dividends can be maintained. However, investors can consider hiking exposures only on price declines.

The proportion of NPAs to net worth, at about 60 per cent, continues to be high relative to other public sector banks. In addition, substantial appreciation from present levels is dependent on sustained growth in dividends over the next few years. However, it is still too early to factor in such growth in dividends. As such, investors can seek to acquire the stock at declines from present levels.

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