As in FY09, UBI?s loan growth in FY10 was significantly higher than the banking system at 23.6%. The growth was back-ended with H2FY10 contributing more than 90% to the incremental credit during the year. SME, retail and agriculture credit segments were the main drivers of this robust growth. In FY11, UBI is targeting a 25% loan growth; a material 5% above the system. Improving credit demand, robust branch expansion and initiatives taken under the ?Nav Nirman? programme back the bank?s confidence to outgrow industry. The C/D (credit deposit) ratio is expected to remain firm in the year with deposits growth targeted at lower 22%.
NIM (net interest margin) to resume a stable trajectory: From H2FY11 onwards, NIM to be near 3% for FY11 and FY12: With the nasty impact of significant mobilisation of high-cost deposits during Q2-Q4FY09 behind, UBI?s quarterly NIM is expected to exhibit considerably lesser volatility going ahead. We expect NIM to correct from 3.4% in Q4FY10 to 3-3.1% in Q2FY11 as a Cost of Deposit (CoD) is set to rise from Q1FY11 while Yield on Advances (YoA) is anticipated to increase materially only from Q3FY11. Recent deposit rate hike, savings interest calculation on daily basis and the 100 bps CRR (cash reserve ratio) hike over the past four months are likely to push CoD by 20-30 bps QoQ in Q1FY11. Over the longer term, we expect UBI?s NIM to be near 3% for FY11 and FY12.
GNPL formation to moderate; asset quality to improve gradually: UBI witnessed substantial slippages from the restructured assets portfolio in Q4FY10, raising Gross non-performing loans (GNPL) to 2.2%. Though additional slippages could happen in H1FY11, GNPL formation for the year is expected to be lower than FY10. It would further fall in FY12, driven by improvement in credit and economic environment.
Moderation in GNPL formation and robust loan book growth would cap GNPL near 2% over the next two years: With UBI continuing to provide adequately for further increase in GNPLs, the provisioning coverage is expected to remain above 70% in coming quarters.
Poised for material rerating over the next 12 months: We believe that UBI would witness material valuation rerating over the next 12 months driven by strong credit growth, stability in NIM, gradual improvement in asset quality and sustenance of above-industry ROA (return on asset) and ROE (return on equity). The bank is our top pick among mid-sized PSBs (public sector banks) as it offers the most attractive ROE-P/adj BV mix. Based on our proprietary valuation model, Bank 20, we assign FY12 P/adj.Book Value (BV) multiple of 1.4x to UBI and arrive at one-year price target of Rs 360.
Robust loan growth in H2 FY10 driven by SME, retail and agriculture segments: As in FY09, UBI?s loan growth in FY10 was significantly ahead of the system at 23.6%. The growth was back-ended with H2FY10 contributing more than 90% to the incremental credit during the year. The recent credit growth witnessed by UBI has been broadbased, with all the credit segments contributing. MSME (micro, small & medium enterprises), retail and agriculture segments grew at a substantially higher pace due to the thrust given by the bank. With this, UBI?s loan book has become more diversified. Within the retail segment, the bank?s focus has been mainly on home, education and auto loans. The bank has 40 ULPs (UBI loan points) across India for processing retail loan leads received from marketing officers and branches. ULPs? average loan processing time is six to seven working days, better than many other PSBs and in step with its private peers. Similarly, the strong growth witnessed in SME credit over the past two-three years has been driven by the set up of dedicated processing centres called Saral that work under the bank?s regional offices. Currently, there are 60 Saral centers that process all SME loan proposals. These centres provide a faster turnaround time and skilled services.
Loan growth outperformance to continue: UBI expects continuation of strong advance growth in FY11. The bank is targeting 25% credit growth in the current year, a material 5% above the system growth forecast of 20% by RBI. If the central bank upgrades its system growth projection in the subsequent monetary meetings, then UBI would also adjust its targeted growth accordingly. The bank?s confidence is set to grow at a significantly higher rate than industry, stemming from improving credit demand, tightening liquidity situation, robust branch addition plans and the various initiatives taken by the management over the past three years to enhance the capacity for growth. UBI expects its deposits to grow by 22% in FY11 implying that C/D ratio would remain at elevated levels. After adding sizeable branches in FY09 and FY10, the bank is targeting opening 500 branches each in FY11 and FY12. This should enable UBI in meeting its Casa target of 35% by March 2012.