An aggressive PSU
Union Bank of India (UBI) made its maiden public issue in 2002. The government of India (GoI) currently holds 60.9% of the pre-issue paid-up equity share capital (Rs 460.12 crore), which will come down to 55.4% after the issue.
As on December 2005, UBI had 2,064 branches and 146 extension counters serving more than 1.5 crore customers. The bank mainly focuses on and will continue to focus on rural and semi-urban regions of India.
The main objects of the follow-on offer include augmenting the capital base. In September 2005, UBI’s capital adequacy ratio (CAR) stood at 10.5% as against the Reserve Bank of India (RBI)-stipulated 9%. The bank intends to take advantage of the domestic economic boom and to venture out internationally. . It plans to expand geographically in India by increasing the volume of retail business and by cross-selling various fee-based financial products and services.
Strengths
- NPAs are reasonable at 4.22% and 1.37% of gross and net advances respectively as on 30 September 2005.
- UBI is perceived as very aggressive in its peer group.
- Good progress has been made towards de-risking the investment portfolio from future interest rate rise.
Weaknesses
Like any PSU bank, fall in treasury gains will continue to limit the rise in profit for UBI also.
Valuation
In the nine months ended December 2005, UBI recorded a growth of 18% to Rs 1776 crore in the net interest income (NII). However, the other income (OI) decreased by 30% to Rs 413 crore. The fall in OI was mainly due to the fall in treasury profit. The operating profit grew 4% to Rs 1138 crore, and provisions declined 20% to Rs 464 crore in the first nine months of FY 2006 compared to Rs 581 crore in the corresponding period of FY 2005. Thus, the net profit increased by 11% to Rs 531 crore.
The scrip currently trades around Rs 120. The last one-year, six- and three-month average price of the scrip stood at Rs 121, Rs 123 and Rs 119, respectively.
At the offer price band of Rs 100-110, P/E works out to be 7x to 7.9x nine-month FY 2006 annualised EPS of Rs 14 on post-issue equity. At Rs 110, September 2005 post-issue book value (BV) of Rs 78 is discounted 1.4 times and adjusted BV of Rs 65 is discounted 1.7 times. The valuation ratios are more or less in line with the peers. However, its aggressiveness will help it outperform the banking sector going forward.