Union Bank of India’s net profit growth continued to be affected by higher provisions for non-performing assets in the December 2010 quarter, rising by just 8.5% to about Rs 580 crore, compared to the same period a year ago. But the bank’s performance improved compared to the September quarter, with profit rising by 91%, chiefly due to a sequential decline in provisions.
The bank’s net interest income (NII is the difference between interest earned and interest paid) rose by 48% to Rs 1,615 crore, and by 5.2% sequentially. Interest income rose at a much faster rate of 27%, compared to interest expenses, which rose by 16%, resulting in higher NII growth.
UBI’s net interest margin too has improved, and at 3.44%, was up 67 basis points (100 basis points equals 1 percentage point), and up 9 basis points on a sequential basis. Lower cost of funds for the bank and higher yield on funds contributed to better margins. Share of low cost deposits (current and savings account balances) improved a little under 1 percentage point.
The bank’s domestic advances rose by 24%, with retail loan growth at 29% and credit to the small scale sector rising by 15%.
Among the segments, which contributed to growth, profits from treasury rose by 67%, but retail showed a decline of 25%, and profits from the corporate banking segment showed an increase of 9%.
On the other elements of cost, its operating expenses rose sharply by 38%, due to a 60% increase in employee costs due to provisions made for additional gratuity and pension liabilities. But expenses were down 7% sequentially, meaning this effect will wear off once the base effect goes. The bank’s provisioning for non-performing assets has risen, with gross NPAs at 2.68% as of December 31, compared to 1.96%, but is a little better than the September 2010 quarter’s 2.79% figure.
For 2010-11, the bank has given a guidance of 25% growth in advances and a low-cost deposit ratio of 35% by March 31 2012, compared to 33.4% as of December 2010. It plans to bring its gross NPA down further, with a target of 2.4% for the March quarter. The risk to its margins comes from rising deposit costs, as banks have begun to hike interest rates to keep up the pace of deposit inflows. That will result in higher cost of funds.
The UBI stock was up by 3.3% at Rs 338, perhaps due to the improvement in its performance, when compared on a sequential basis.