Stock Pick From The Banking Sector

Low Priced Scrip is hidden gem, today's underdog, a stock with future potential that is expected to fetch returns within 1 year. This is a stock picked carefully based on a fundamental analysis of the company.

The company recommended as the Low Priced Scrip for this issue is a leading Bank in India.

United Bank of India - Attractive Yields

Banking stocks have been beaten down heavily in the past one month. This is evident from the fact that the BSE Bankex is down by almost seven per cent, and if we look at individual banking stocks, the downside is more. The stock of United Bank of India (UBI), a PSU banking company, has been beaten down by almost by 14 per cent in the past one month. So, the question arising in the minds of investors would be, should one invest in this scrip now? We, at DSIJ, believe that the bank has shown a decent performance. The stock has a good dividend yield, and after having been beaten down sharply, it is currently available at a low valuation.

As of March 31, 2012, UBI posted a fair business growth, which was almost in line with the industry’s expectations. The RBI had forecasted a deposit and advances growth of 15.5 per cent and 16 per cent respectively for FY12. For FY12, the bank reported a deposit growth of 14.5 per cent to `89116 crore, while the advances grew by 18.4 per cent to `63873 crore on a YoY basis. A majority of the bank’s advances (around 59 per cent) are to large and mid-sized corporates. Its CASA deposits increased by 14.4 per cent to `36329 crore, and the bank was able to maintain its CASA ratio at 40.8 per cent.

CMP as on May 29, 2012

In the current environment, most banks are facing issues on the asset quality front. However, to its credit, UBI has shown an improvement in its asset quality too. Its Net NPAs decreased by 29 basis points to 1.72 per cent on a sequential basis, which is commendable. Its Provision Coverage Ratio (PCR) stands at 69.15 per cent, which is slightly lower than the RBI comfort level of 70 per cent. Thus, with a decline in the Net NPAs and a decent PCR, we believe that the bank may not face much pressure on the asset quality front going ahead.

On the margins front, the bank faced some pressure as the Net Interest Margin (NIM) decreased by 13 basis points to three per cent on a YoY basis. Considered on a sequential basis, its NIM declined by 38 basis points. This was due to the cost of deposits having increased by 23 basis points, and the yield on investments having declined by 29 basis points. Nevertheless, we believe that with the interest rates reversing, the bank’s NIM will improve going ahead.

As on March 31, 2012, its Capital Adequacy Ratio stood at 12.69 per cent, with Tier I CAR at 8.79 per cent, which is well above the government’s comfort level of eight per cent for FY12. Further, we believe that with the government’s holding in the bank at 81.55 per cent, UBI would easily get funds to meet the Basel III norms, which still has a long time to be implemented.

For the full year (FY12), its Net Interest Income (NII) increased by 14 per cent to `2479 crore, while the Net Profit increased by 21 per cent to `632 crore. It posted good bottomline growth even after making higher provisions, which
increased by 17 per cent to `972 crore.

The board has recommended a dividend of `2.40 per share, and the dividend yield based on the same works out to be around 4.06 per cent, which is very healthy. The stock is available at a very low valuation, with the Price-to-Earnings multiple standing at 3.73x and the Price to Book Value at 0.51x. This is one of the lowest in the industry. One could invest in the scrip keeping in mind a long-term horizon to garner better returns.