A combination of these factors would have led to exceptional growth in profits in any other year. The need to make a provision of Rs 660 crore for decline in the value of government securities and wage arrears has largely neutralised the impact. Only a reduction in provision for bad loans and a change in accounting for foreign exchange transactions helped Union Bank of India report measly growth in profits.

Positive outlook

The factors mentioned above, however, augur well for profit growth in FY-06. Union Bank of India is targeting business growth of about 25 per cent in the coming year.

Mr Cherian Verghese, CMD ... Restructuring the balance-sheet to add value.

Even if spreads decline, reporting a 10 per cent profit growth may not prove daunting for the bank.

The bank had a credit-deposit ratio of 66 per cent at end-March 2005. If investments in non-SLR securities are also considered, the bank has one of the highest credit-deposit ratios among public sector banks. What this means is that in the event of a sharp upturn in interest rates, the bank would not be as badly hit as many of the other public sector banks. Rise in interest rates may even work to the bank's benefit.

In addition, the dependence on windfall gains has come down. Profit from securities and exchange transactions were about 21 per cent at end-March 2005 compared to 32 per cent the previous year.

It is still high compared to private sector banks, which typically derive only about 5-7 per cent from such activities.

Still, the risks to profit growth from interest rate or forex fluctuation appear that much lower now because of the reduced proportion. In this context, if the circumstances such as interest rates and robust credit offtake remain stable and favourable, Union Bank of India may even surprise and report a higher level of earnings growth in FY-06.

Undemanding valuations

Union Bank of India sports one of the highest debt-equity ratios in the banking industry. This exaggerates the return on net worth earned by the bank. At 25 per cent, it is one of the highest in the industry.

Expansion of equity capital, which appears inevitable, may lead to a reduction in the return on net worth numbers. This could also constrain growth in earnings per share.

The valuation, however, does not factor in such a high return on net worth. With the PE at about 7 and a dividend yield of 3.3 per cent, required growth in earnings over the next few years to deliver reasonable growth in stock price does not even cross two-digits.

Even in a situation of falling spreads and severe competition from private sector banks, required earnings growth should be achievable.

The improvement in the bank's competitive strengths is a positive factor in this regard.

That Union Bank of India is also one of the earliest investors in technology upgradation among public sector banks also adds to the comfort levels in owning the stock.

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