Union Bank of India (UNIONBANK) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Union Bank of India Q3 FY '20 Earnings Conference Call hosted by Elara Securities Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rakesh Kumar from Elara Securities Private Limited. Thank you, and over to you, sir.

Thanks, Aman. Good evening, everyone. I welcome you all on the Union Bank conference call. We have on the line entire top management team from the Union Bank of India, led by Mr. Rajkiran Rai G., M.D. and CEO; Mr. Gopal Singh Gusain, Executive Director; Mr. Dineshkumar Garg, Executive Director; Mr. Manes Ranjan Biswal, Executive Director; and other team members. I would like to request CFO, ma'am, to read out the disclosure statement. And thereafter, we can start the call. Thanks, and over to you, ma'am.

Good evening, everyone. Before getting into the con-call, I'll read out the usual disclaimer statement. I would like to submit that certain statements that may be discussed during the investor interaction may be forward-looking statements based on the current expectations. These statements involve a number of risks, uncertainties and other factors that cause the actual results to differ from the statements. Investors are therefore requested to check the information independently before making any investment or other decisions. Thank you. Over to you, sir.

Yes, good evening. It is my pleasure and privilege to welcome you all to Union Bank of India Investor Conference Call on financial results for quarter ended December 31, 2019. This being our first con-call of 2020, let me wish you all a very Happy New Year and very happy and successful decade of 2020s. May we together achieve success in our chosen endeavors. Coming to the bank's financials for quarter ended December 2019, Union Bank continued to progress well along the directions we shared at the beginning of quarter. The business and financials tell you a sustained pickup in efficiencies. As on December 31, 2019, global advances grew by 5.8% on an annual basis, while deposit registered a growth of 10.6% on an annual basis. On a more granular basis, retail advances grew by 10% while CASA and retail term deposit contributed to the deposit growth. The bank noted an operating profit of INR 2,402 crores during Q3 of financial year '20, an increase of 7.2% sequentially and 32.7% on an annual basis. The bank had some major recoveries through NCLTs this quarter. However, even adjusting for one-off gains, our performance on efficiency metrics is encouraging. The net profit stands at INR 575 crores during Q3, as against INR 1,194 crores loss in the previous quarter and a profit of INR 153 crores in the corresponding quarter a year ago. The provision coverage ratio stands at 67.42% as of 31st December. Yield on advances improved by 12 basis points sequentially to 8.01%, while cost of deposits came down by 13 basis points to 5.53% for September 2019 quarter. Net interest margin rose 12 basis points sequentially to 2.47%. Cost-to-income ratio improved to 43.43% compared to 44.66% during previous quarter. Slippages during the quarter was INR 5,112 crores, which include about INR 2,269 crores exposure to 1 HFC. The bank noted marked gain in recoveries, including recovery of INR 328 crores in written-off accounts for the quarter. Factoring in the development during the third quarter, our guidance for the financial year '19-'20 will be: credit growth to be 7% to 9% and deposit growth of 9% to 11% for '19-'20; NIM about 2.30; delinquency ratio in the range of 4.5% to 5%; credit cost around 3% and PCR at around 70%; cost-to-income around 46%; gross NPAs around 14% and net NPA around 6% by March 2020. Thank you. Now we are open for questions.

[Operator Instructions] The first question is from the line of Chinmay Desai from Anvil Shares.

Just on the DHFL account, what is our exposure? And how much have we taken this quarter? And what's the provisioning on that that we have right now?

I think our exposure is INR 2,267 crores, and the provision as on date is 25%.

Sir, this would include even the investment exposure?

Investment is separately being done. That's the -- actually, it doesn't include investment, but there also the provisions done as per the policy.

So what's the markdown you've taken there?

INR 250 crores, 25%.

25% on investment group policy.

Yes.

Yes, that also 25% you may take.

INR 250 crores.

Sir, if it's okay, could you share the exposure on the investment book?

INR 250 crores.

Also sir, what was the chunky recoveries that we've seen this quarter?

It was Essar Steel as like everybody had done it and then Prayagraj, then Ruchi Soya.

Okay. Sir, could you give the exposure, recoveries.

Yes. I think...

Essar INR 1,693 crores, sir.

Essar exposure was INR 1,693 crores. Recovery was?

Recovery was INR 1,930 crores, sir.

INR 1,930 crores.

And Prayagraj INR 231 crores in the recoveries.

Prayagraj, there was a hit.

Yes.

Exposure was 500...

INR 543 crores.

INR 543 crores. And recovery was?

INR 231 crores, sir.

INR 231 crores. And...

Ruchi Soya INR 136 crores.

INR 150 crores is the recovery?

INR 136 crores.

INR 136 crores is the recovery, INR 240 crores is the outstanding.

Yes. Okay. Essar outstanding was INR 1,693 crores, Prayagraj outstanding was INR 543 crores, Ruchi Soya exposure was INR 240 crores. So Essar recovery was INR 1,930 crores, Prayagraj recovery was INR 231 crores, Ruchi Soya recovery was INR 136 crores.

Sir, in the Essar Steel account, how much is the interest recovery?

About INR 200...

INR 239 crores.

INR 239 crores.

The next question is from the line of Mahesh from Kotak Securities.

I just wanted to check a couple of things as to -- on the -- for the fourth quarter, how are you seeing the recoveries and upgrades?

Fourth quarter, actually, our recovery is expected to be around INR 3,000 crores-plus, actually. So that is coming from -- like, major accounts, we're expecting Bhushan Power and Steel. And there are a few more accounts which are very close to -- they seem like -- see Religare Finvest already approved by majority of the banks, so that has to be upgraded now. So -- then Jindal Thermal is another process which is going on. So -- where -- our bank has approved and few more banks are to do -- that also will be closed, in fact, and that will be done. Then, Anrak Aluminium is another case where we expect the recovery to happen. Alok has to be closed this quarter.

Okay. Anything else on the power side, sir?

Jindal is one, which is almost final. So I think in NBFC, there is only power because Korba is done, Prayagraj is done.

GMR Infrastructure is done.

GMR Infrastructure is done.

And sir then, Coastal Energy, do you have any exposure?

We don't have exposure in Coastal.

And this quarter, again, your slippages have come very large on the SME side. If you could just give us some color on what's happened there? Because even if you strip off INR 2,000 crores as a one-off from Dewan, the slippage is still quite high.

INR 2,800 crores, so if you take that out, it is close to INR 2,800 crores. Actually, generally, our slippages will be between INR 2,000 crores to INR 2,500 crores because of the MSME. MSME, this quarter slippage is INR 1,121 crores. So if you take that, like, I think that's the major chunk, actually. Because agriculture also contributed INR 714 crores.

Now specifically on the MSMEs because this number seems to be quite high.

Yes. MSME slippages actually, like, are happening because, actually, -- but one thing, it is not only the small. Actually, there is some stress in the medium-size also. So -- actually, this number -- that's why we say conservatively that the -- there is no chunky account like the Dewan Housing Finance which happened this time, which we don't foresee in Q4. Q4, we don't see any chunky big NPA. But then the NPA slippage can be in the range of INR 2,000 crores to INR 2,500 crores. This will be the normal range, I think. It is purely because of MSME.

Okay. And my final question, what will be your SMA-1 and 2, sir?

SMA-2 is INR 10,300 crores. SMA-1, generally, we are not disclosing. So SMA-2 has come down. It is INR 10,300 crores. Out of that, corporate book is around INR 2,000...

INR 2,100 crores.

INR 2,100 crores. So the corporate, actually, we don't foresee any big ones now.

The next question is from the line of Anand Dama from Emkay Global.

Sir, we had NPA divergence for FY '19, which we had earlier reported. How have we treated that NPA divergence in this quarter?

No. NPA divergence, we booked fully in the second quarter. So there is no divergence in this quarter. Because RBI report is annual, so only once they give that and that we fully absorbed in Q2. There is no spillovers.

Okay. So even in provisioning side, we have done all the...

Everything. Everything, last quarter, we absorbed.

Okay. So nothing was there in this quarter?

No.

Sure. And sir, apart from that, any other large lumpy stress which is pending, which possibly could be sitting into our book at this point of time or something similar to DHFL or that size as such?

No. Nothing, nothing.

Sir, Air India, I believe, we had an exposure, some...

No. We don't have.

We don't have any exposure with that?

Yes.

And sir, on the discom front, basically, what's happening? So many of the discoms are still reeling under pain as of now, and I believe this year onwards, the UDAY bond repayment also will start as such. Sir what is happening over there? And whether there could be another bailout which can come for discom as such?

See, discoms cannot be allowed to fail because that is -- because then the whole country will go to darkness. So I think the government is already working on that. That's what we understand. So hopefully, this will be resolved. Because one good thing with the discoms, in the last 3, 4 months, the payments of current dues are very up-to-date to all power generators. So old overdues are there which are getting resolved slowly, but the current dues are regularly paid. So that way, there is some substantial improvement in the working of discoms. Yes, there is some pain in the discoms. So there are huge payments to be done and all that. So I think already some discussions are going, and you would have heard the government also speaking on that. So I don't think it will be allowed to fail.

Sure. Sir that is certainly expected that the government will not allow them to fail. But sir, basically, what kind of bailout package that you feel that or maybe help that can actually come from the government side given that their own fiscal numbers are pretty stretched?

I agree. But then, see, here, the issue is in the discoms, the operating efficiencies have to improve, like it is their billing and collection. That is the only area. So whichever discom is doing very well, on the billing and collection area, they will be out of the problem. So these are -- actually, here the state governments are -- have to come out and there should be some discipline there. Basically, they announced free power and all that. So -- and after that, they don't pay the subsidy amount to the discoms on time and that may be the reason, actually. So I think some discipline on that front will help because I'm as naive as you on this kind because what government is thinking I don't know. So let us see how it shapes up. Because these discussions are not taking place with us. So we don't know what is in their mind.

Sure. Sir, what is our discom exposure?

Our distribution PSC exposure is INR 4,600 crores. But they're all in good discoms, very selectively we are doing.

Okay. Sir, anything that you will have in U.P., Rajasthan, M.P.?

U.P., no; Rajasthan, no; M.P., also no.

Okay. Anything in Tamil Nadu?

Tamil Nadu electricity [Foreign Language] yes.

Okay. Sir then this INR 4,000 crores split, if you can help me with like what...

It is more on Karnataka, Orissa, that kind of states.

Okay. There, you don't see any concern, except for, I think, in case of Karnataka?

Yes, I think, even Karnataka is safe, actually. That way, we don't see a problem.

Okay. And sir, this SME restructuring, again, has been on a higher side, slippages has also have been on a higher side for us. Where do you see basically the SME stress settling, sir?

See, MSME -- like the restructuring is completed for the earlier part, what was announced earlier. So we restructured worth INR 1,026 crores in MSME.

In this quarter?

No. That is totally from the earlier...

Cumulative?

Yes. Cumulative INR 1,026 crores because there is an earlier RBI announcement of January 2019, so -- which got completed. And we did INR 1,026 crores. It is not a very big amount, actually. So and then again, this announcement, we are waiting for more clarity. So what is the amount which will fall under the eligibility criteria and all that, we will see and then we'll be able to put out. But the stress in MSME sector is gradually because -- see, this was there for some time, but the recognition part is happening and it was a bit escalated in the last 2, 3 quarters because what happened whatever could not be restructured, they slipped. So I think it should moderate now.

Okay. And sir, when can we have the swap ratios for the merger?

Anytime now because we are waiting for the final guideline. So it can be anytime, but the process is on.

Okay. Sir, in the preliminary due diligence basically anything surprising or on the negative side that you have seen in the books of...

No, no. Nothing on that.

Nothing. Nothing on the pension front or retirement liability and stuff?

Like -- see, there will be a procedure called harmonization because actuaries generally are different, so there will be some minor differences here and there. So that will be taken care in the harmonization part, but then nothing major.

Sir NPA harmonization also had some impact or because basically, they had these -- some NPAs to be recognized and provisions to be made primarily because of these NPA harmonization among the banks?

I think a bit premature to talk about it at this point of time because actually the harmonization part is not quantified yet, actually. It is in the process. It's a bit premature. So let us see because earlier like -- whether it has to be absorbed before March or it can be in the first balance sheet of June, those things have to be seen.

The next question is from the line of Jai Mundhra from B&K Securities.

Sir, in your opening remarks you mentioned that the net NPA to be below 6%.

Around 6%, I said.

Yes, okay, around 6%. But sir, I mean of course, there is a PCA threshold of 6%. So ideally, right, you should be moving to below 6% kind of a threshold. And if I do the just rough maths, it looks like you have to decrease your net NPA by around INR 2,500 crores to INR 3,000 crores, roughly in that range. You would have some slippages, additional normal slippages and then you said there are some recovery as well. So sir, first on -- 2 questions on this part, sir. One is the INR 3,000 crores kind of a recovery that you mentioned. But if I were to look at Bhushan and Alok, probably, they will be only having INR 800 crores to INR 900 crores kind of a recovery on realized basis. So what else do -- are you sort of factoring in the recovery? And second, if the shortfall or if the net NPA reduction would be through write-off? So that is the broad understanding...

No, this INR 3,000 crores I'm not including write-offs as of now because the write-off will have an impact on gross NPA, not on net NPA. So that's why we changed -- said that net NPA will be around 6%. It is not necessary, as of now, there's a thrust to threshold. I think this is a balancing act for me between -- like, see, for me, -- like I need to have a full year profit also. So that is another concern we have. So either you can make more provision and bring net NPA below 6% or have a full year profit. So this is something like -- is a choice.

Understood, understood. Sure, sir. And sir, if you can specify this INR 3,000 crores of recovery, Bhushan, Alok are the 2 large cases. But anything apart from these, sir, where you have -- which could give you sizable recovery?

I'll tell you, like, yes, Bhushan, the expected recovery is around INR 743 crores, Alok INR 104 crores, Anrak Aluminium INR 127 crores, and there are smaller accounts. Actually, like these are all NCLT cases, where we are expecting around INR 1,500 crores. Then we are expecting upgradations. Upgradations will just -- one of the -- Religare Finvest, that is already like approved now. So that will be upgraded. So -- and then my -- generally Q4, a lot of compromises which we have approved. Generally, the cash recoveries cross INR 1,000 crores in Q4, the small and medium ones. So we are expecting that all this will help us to, like, reach that INR 3,000 crores. It is recovery plus upgradation because that reduces the NPA.

Sure, sir. Sure, sir. And second, sir, apart from Dewan, was there any other large slippages this quarter of around INR 700 crores, INR 800 crores?

Next big one was INR 300 crores. Yes, INR 300 crores. Next big one was INR 300 crores.

Okay. And which sector was this...

Construction company and then there was a road of exposure of INR 150 crores. So like not very, very big. Actually, see, the total corporate slippage was INR 3,018 crores. Out of that, if you take out INR 2,260 crores, so it is hardly less than INR 700 crores, other corporates. So that will be the number we will be looking at as we go forward. So when I say the NPA slippage should be ideally between INR 2,000 crores to INR 2,500 crores, this is where we derive roughly our numbers.

Sure, sir. And sir, any visibility on this 5/25 restructuring book? Now so far, it has been very steady, but is it still some time before they come out of sort of a slated moratorium? Or they would start coming out of repayment -- the scheme?

We don't foresee any problem in 5/25 accounts. Whatever to be slipped has slipped and whatever existing accounts, like -- see -- like, there is no pressure there. They are all very normal. Actually, behavior is very good.

The next question is from the line of Mohit Khanna (sic) [ Surana ] from CLSA.

This is Mohit Surana from CLSA. So what is the total quantum of interest income from recoveries that was one-off in this quarter?

Only in case of Essar, no? It had INR 237 crores.

Okay. Okay. Okay. And next question is your operating costs have declined quite a bit in this quarter. So I just -- if you can give some color on this?

No. It is steady at the same level, I think, INR 1,800 crores?

Operating expenses, yes, INR 1,800 crores.

It is not -- like -- I think it is around that level.

Same level.

Same level.

It is -- if I can see correctly, it is INR 978 crores, right, other operating expenses?

That's other operating expenses.

Other operating expenses, apart from the employee cost. That is the cost...

Okay. Okay. Yes, yes. Employee cost, we made some provision on the wage revision, some escalatory provision we made, INR 260 crores provision we made -- INR 265 crores. Generally, we used to make INR 60 crores per quarter. So now this quarter, we made INR 265 crores, so -- on the employee side. On the other operating expenses, it may be my ATM expenses which came down? Other operating expenses?

ATM -- the cost...

Cost and ATM, I think, there is some curtailment of cost, I think. That I think we can give you offline also. Nitesh will give you the details where exactly it has gone down.

Got it. And lastly, in terms of overseas business, you've shown quite a strong growth this quarter. So any color on that?

Yes. This is owing to pre-Nirav Modi days, actually. Actually, we were very solid in these branches earlier, but then we are getting very good portfolios there. So we are taking exposures, very good corporates and good exposures. It is mostly, actually, not much of new businesses as such. It is basically sell down by other banks. Generally, that is how the international markets operate. So we mostly take short term where the maturity is below 1 year and that kind of thing. So the foreign banks and other banks, they sell down regularly. So we are taking that exposure. Since we have the cushion and where we have the margins, we are taking. So we are very steadily growing.

Okay. Okay. And if I may squeeze in one more. Sir, I just wanted this data-keeping question, outstanding security receipts for this quarter and last quarter?

Outstanding security receipts?

Yes.

INR 720 crores.

INR 720 crores, INR 720 crores. So last quarter was...

INR 920 crores.

INR 920 crores. INR 200 crores has come down.

[Operator Instructions] The next question is from the line of Mahrukh Adajania from IDFC.

Sir, what is the total provisioning write-back from the provisioning line?

In case of Essar only it was there. I think -- but then that goes below operating profit.

Yes, yes. That's what I'm asking, provisioning, total provisioning write-back.

Yes. So actually, like -- it would have gone for additional provisioning to NPA. So like it doesn't reflect on the operating profit side. About INR 800 crores of provision write-back would have come from Essar, roughly.

And that's it?

Yes. That would have, like, adjusted in the provision side, actually.

Okay. And not from any other account, only INR 800 crore from Essar?

Others are in the recovery in write-off accounts. Other 2 major accounts, actually, where the recovery came, so our write-off -- recovery in write-off account is INR 300...

INR 327 crores.

INR 327 crores.

INR 327 crores. So wherever, we have made 100% provision and written-off, that will go to the recovery in write-off and directly goes to the profit actually.

So in the other income?

Yes, other income.

Got it. And sir, just one more question. You said that of your total other slippages other than Dewan on the corporate side, one was construction and the other was road, did you say road?

Yes, yes, Dewan, yes.

Okay, sir. Sir, and just one last question on the real estate side, RBI has given this DCCO dispensation, right, for 1 year, so have you been able to assess how much portion of your real estate exposure qualifies for this -- toward this, what percentage, like 20%, 30%, what percent?

Actually, our real estate exposure is not that large. And as of now, we don't foresee any problem. But then we assessed about INR 700 crores of our exposure may become eligible under this RBI dispensation.

INR 700 crores. Okay.

They -- it is not that they need it, but then they may become eligible if required.

Okay. And what would be your total real estate exposure?

INR 3,800 crores, CRE exposure.

INR 8,800 crores.

No, INR 3,800 crores.

The next question is a follow-up question from the line of Mahesh from Kotak Securities.

Sir, just 2 more clarifications. On Religare, given the fact this will probably be one of the first few instances of an NBFC resolution, was there a public bond issue as well in this?

No. This is a healthy group take over, actually.

No, I'm just trying to understand from the other side. When you're marking down the debt, how was the resolution from the NCD side?

Okay. Actually, for the NCD holders?

Yes, I'm just trying to...

Haircut was uniform for everyone.

Whether you are secured, unsecured, it really didn't matter?

Actually, yes, it didn't matter because actually does -- here, actually, we didn't have that public deposit issue, I think. Actually, wherever we have public deposit, we have this problem. Otherwise, the NCD holders and lenders are almost similar. So they're, actually, coming to an understanding doesn't, like, create a problem.

Perfect, perfect. So this is one thing. Second one is that on the earlier question on real estate, just one clarification. If an account has been classified as NPL under the restructuring norms of the DCCO being not completed with -- for the clause of DCCO completion, can you now upgrade the asset?

No, I don't think so. This is our accounts, which are standard as on the day of restructuring.

No, no. Let's assume that...

If the account is already NPA, it will continue as NPA even if you extend the DCCO.

Okay. So it has to be standard?

Yes, it has to be standard on the date of debt.

[Operator Instructions] The next question is from the line of Rakesh Kumar from Elara Securities.

Sir, just one question I had, like this time, interest accrual, like total interest income on advances, like not looking that high, so was the reversal also because of this MSME and agri loans slippage this time?

Reversals are there every quarter. This time also it is around INR 200-plus crores. I think we can give that number. So reversals are there every quarter.

Yes. So was it like relatively higher on securities...

No, it is almost similar to last quarter.

Around INR 200 crores of total reversal.

Yes, I think. Yes, reversals are there, actually. We can share that number. It is almost stable, actually.

Next question is a follow-up question from the line of Mahrukh Adajania from IDFC.

Sir, just on this real estate thing, I just -- I don't know if you have an answer. Sir, any idea why this has been notified only for banks and small finance -- commercial banks and small finance banks and not NBFCs who are more in need of this?

I also have no idea because this should have been ideally extended to NBFCs. I agree with you. But...

So they can change it or no?

I don't know because initial, like, discussions -- because actually, banks do not have many issue with the commercial because we are not a major lender. Our exposure is mainly through the NBFC. So I agree with you, it should have been given to NBFC. It has not come. Let us see whether there is any rethinking on it.

But, sir, they'll have to refile the circular, is it? I mean they'll have to reissue the circular? Or how does it...

Actually, they have to extend to NBFC, but whether they're in a mood to do that, RBI would have already examined it before they said it. So I -- like, I don't know whether they will do it or not. But then, it will be a great relief if they do it for NBFC.

The next question is from the line of Sushil Choksey from Indus Equity Advisors.

Sir, just needed a little update more on a merger point of view where HR and technology concerned? And are we on track for 31st March, 31st April as a combined bank?

Yes, we are fully prepared. Actually, that we -- our preparedness is up-to-date because on the technology side, actually, all the engagements have happened. So including the consultants and talking with the Finacle, that is, Infosys, all that, we are prepared, actually, for the day 1. And on the HR side also most of the policies are already getting approved now. So we are harmonizing the policies between the 3 banks and all that because there are several committees formed at GM level, ED level and all that. So I think our preparedness is up-to-date.

Sir, but to complete the entire exercise between now and 31st March, there is less than 50 days left.

See, on the technology side, what will happen is the work will start. There is a -- like Bank of Baroda, there'll be one system available in all the banks, all the 3 banks -- branches where they can go and operate and get some basic services. Like, in my case, Andhra Bank can -- Andhra Bank customer can walk into Union Bank and get some basic services. Some 12 services are listed under that. That basic services, which is 90%, 95% of the customers use. So they will be able to transact. But getting the technology platform together, all the 3 banks, this should take anything between, like, 9 to 12 months.

And do you estimate the accounting provisions or NPA management and all this will be aligned as of 31st March for all the balance sheets together or you'll have to look at it after the merger happens?

No. In that way, we are continuously looking at it. There is a lot of study which is happening. But the quantification part, actually, that way, the data and all that is all available. So we'll look at it like one -- actually, now the first step is the swap ratio announcement because that is a legal process where SEBI and other things are involved. So we are waiting for that. As soon as we get a go ahead for that, so once that is done, other things, we are in good control. I think that should not be a problem.

Ladies and gentlemen, due to time constraints, that will be the last question for today. I'll hand the conference over to the management for their closing comments. Thank you, and over to you.

Yes. So thank you very much. I think -- thank you to the community who are the analysts and the investors, the way you participate. And we also try to transparently provide the information. So this quarter, if you look at it, even if you take the one-off transactions of Essar, I think the bank has done very well. The operating efficiencies are very steady, like the growth projections and other efficiencies are as planned. So as we go forward, like, we are looking at further consolidating again. So thank you. Thank you for all your cooperation. So hopefully, the merger process also should not disrupt our -- the efficiencies what we have already built. So we are planning accordingly. So like maybe as we get certain clearances, we come out transparently -- more transparently on those dates and other things. Until then, goodbye, and thank you.

Thank you very much. Ladies and gentlemen, on behalf of Elara Securities Private Limited, that concludes today's call. Thank you for joining us, and you may now disconnect your lines.

Thank you.

Thank you.