India's Union Bank praised for delivering well on asset quality and NIMs

PPOP also saw positive growth.

India-based Union's Bank 1QFY15 performance was in line on PPOP and PAT beat was driven by better asset quality and lower-than-expected credit costs, and it has been observed that management has delivered well on its guidance of stable to improving asset quality and NIMs.

According to a research note from Nomura, further, slowdown in loan growth as guided will be a positive given Union's weak capital levels.

Asset quality remained stable with slippages contained at INR12.7bn, similar to quarterly run-rate seen in 2HFY14 of ~INR12bn.

Also, net slippages were lower q-q (1.7% vs 1.8% in 4Q14) as upgrades/recoveries were also higher at INR3.2bn.

Incremental restructurings, were significantly lower at INR4.7 vs quarterly run-rate of ~INR12bn in 2HFY14 and lower than management’s guidance of INR15bn.

Management denied any potential spillover into 2Q15F and remained confident of sustainability of the improving trends.

Here’s more from Nomura:

INR4.5bn was sold to ARCs of which INR3.5bn was SMA-2 accounts and INR1bn was from written-off accounts.

Lower restructurings and contained slippages resulting to lower than expected LLPs of ~90bps and INR1.4bn write-back in investment provisions led to ~30% PAT beat.

Core PPOP grew by 9% y/y after contracting in the previous five qtrs.

PPOP growth was led by:

1) 5bps q-q improvement in NIMs on account of ~170bps expansion in LDRs. Management's guidance on improving margins to ~3% by year-end seems ambitious but increasing share of +A rated accounts v/s AAA corporates will aid advances yield, in our view.

2) Overhead expenses were lower as large part of branch expansion and lease renewal related expenses were incurred in FY14 itself and management is confident of lower overhead expense going forward.

Core fee growth weakened further to 4% y-y on slower growth in the corporate segment.

Pick-up in loan growth to 18% y-y was largely led by higher growth in retail segment which grew 7% q-q and agri grew 4% q-q, while growth in corporate segment was muted.

Such high growth is not positive for Union bank considering its low Tier-1 levels (7.4%) but management intends to slowdown to ~10-12% RWA growth and that will be positive from a capital perspective.