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Union Bank of India's Q3FY18 results (Underperformer) - Another quarter of loss

Q3FY18 results highlights

• Union Bank reported a loss of Rs12.5bn driven by lower trading gains, higher MTM provisions and high loan loss provisions. The loss would have been higher if the bank did not debit interest expenses on AT1  bonds to shareholders’ funds. The total interest expense debited to net worth is Rs2.7bn for 9MFY18 and Rs0.91bn for 3Q18. In the earlier quarters the bank had charged this interest through the income statement but in 3Q it decided to debit reserves because of weak profitability.
• Slippage rose qoq from Rs27bn to Rs42bn due to divergence of Rs14bn. Union’s total divergence for FY17 was Rs28.5bn of which around Rs14bn slipped in 3Q18 and the rest in the previous quarters. Total stress loans now account for 18.9% versus 19.3% qoq.
• NIM rose qoq from 2.08% to 2.23% because the bank started debiting interest expenses on AT1 through shareholders’ funds against the earlier practice of charging them through the income statement. The interest charge of Rs1.8bn for 1H2018 was reversed from the income statement in 3Q and instead debited to reserves while the charge of Rs0.9bn for 3Q was directly debited to reserves. Had it not been for this adjustment, NIMs would have been lower at 1.98% against the reported 2.23% while adjusted NII would be 11% lower than the reported. Adjusted NII declined 2% qoq and grew 6% yoy against the strong growth of 19% yoy and 10% qoq in reported NII. Loans grew 12% yoy and 1% qoq driven by a strong growth in retail of 23% yoy.
• Trading gains were much lower at Rs60M against Rs4.8bn qoq. The bank also booked MTM provisions of Rs7bn versus Rs1.7bn qoq. The net treasury loss for 3Q was Rs6.4bn against a net gain of Rs3.1bn. To protect against rising bond yields, the bank has decided to sell its excess SLR upto Rs160bn. The bank also brought down the proportion of AFS from 39% to 33%. However the cut off yield on the investment portfolio remains low at 7.3% against the current yield of 7.8% and the duration remains high at 4.7 years which points out to higher losses in 4Q if yields don’t retrace from current levels.

Valuation and view: We cut earnings to factor in higher MTM losses and loan loss provisions. We cut TP to Rs125. We see RoE remaining low in FY19E and recovering to 10% by FY20E.  Management guided to 10% loan growth, slippage of 5.2% of loans and NIM of 2.1% for FY18. Management guided to repricing pressure on loans in 4Q. For FY19 management guided to credit cost of 2% and NIMs of 2.25%.