Union Bank's asset quality improves in Q4

It may be too early to say the public sector banks are on the mend, but the asset quality pressures could well be abating, if the March quarter numbers of Union Bank of India are anything to go by. The government's policy of 'benign neglect' might be yielding results, as the bank's asset quality has marginally improved during the quarter as cash recovery and upgradation of accounts jumped 125% sequentially.

Slippages or incremental increase in accretion of stressed assets also fell 11%, sequentially, to Rs 1,547 crore in the March quarter. Gross non-performing assets (NPAs) as a percentage of advances declined to 4.96% in the March quarter from 5.08% in the December quarter. Net NPAs fell to 2.71% in the fourth quarter from 2.95% in the third quarter. However, restructuring remained high at Rs 2,370 crore during the quarter, while total restructured loans stood at Rs 18,100 crore (7.5% of loans).

While the improvement in asset quality was promising, growth continues to be a challenge. The bank's net profit declined 23.4% to Rs 444 crore, compared to the corresponding quarter last year. The decline in profit would have been higher had it not been for a tax write back of Rs 180 crore during the quarter. According to Reliance Securities, profit was partially supported by tax write back.

Provisioning, too, has increased during the quarter, as provisioning coverage ratio 59.23% in the March quarter from 57.25% in December quarter. Total provision during the quarter was Rs 1,209, compared to Rs 1,163 cr December (Rs 741 crore in Q4FY14). As the bank's NPAs age, the provisioing requirement has increased explain analysts.

On the operational front, the bank has fared much better. Higher income growth and lower costs helped the bank post a 25.2% to Rs 1,652 crore. Advances grew 11.6% year-on-year, while deposit growth was 6.4%. Net interest margins contracted from 2.50% to 2.37% in the December quarter. The bank exited FY15 with a net interest margin of 2.58% against 2.64% in FY14.

Union Bank currently trades 0.4 times its adjusted book value (FY17), but growth will remain capped, given the capital constraints. Emkay Global expects the bank's low capital adequacy to constrain the lender's profitability ahead. Also, capital infusion by the government, if below book value, would contain return on equity improvement, the brokerage explains.