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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 per cent sequentially. Slippages or incremental increase in accretion of stressed assets also fell 11 per cent, sequentially, to Rs 1,547 crore in the March quarter. Gross non-performing assets (NPAs) as a percentage of advances declined to 4.96 per cent in the March quarter from 5.08 per cent in the December quarter. Net NPAs fell to 2.71 per cent in the fourth quarter from 2.95 per cent 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 per cent of loans).
While the improvement in asset quality was promising, growth continues to be a challenge. The bank's net profit declined 23.4 per cent 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 per cent in the March quarter from 57.25 per cent 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 per cent to Rs 1,652 crore. Advances grew 11.6 per cent year-on-year, while deposit growth was 6.4 per cent. Net interest margins contracted from 2.50 per cent to 2.37 per cent in the December quarter. The bank exited FY15 with a net interest margin of 2.58 per cent against 2.64 per cent 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.
