Elevated provisioning leads to pre-tax loss; net slippages down QoQ
* UNBK reported pre-tax loss of INR3.1b, led by elevated provisioning (+42% beat). While net income was largely in line, controlled opex performance (7% beat) led to a beat on PPoP (+51% YoY, 12% beat).
* Key Highlights:
(1) Provisions were impacted by high MTM losses on investments (INR6b); NPL provisions were stable, yet elevated (INR2b). (2) Opex grew just 2% YoY and 5% QoQ. Employee expenses declined 11% YoY (- 3% QoQ). (3) NII grew 15% YoY, led by strong growth in interest-earning assets. Domestic NIM expanded 36bp QoQ to 2.4%, as 3Q was impacted by interest income reversals. (4) Fee-based income grew 16% QoQ.
* Net slippages declined 31% QoQ to INR20.3b (2.9% net slippage ratio v/s 4.5% in 3Q), led by moderation in corporate slippages to ~INR20b (v/s INR30.4b in 3Q), and higher recoveries of INR9.3b (v/s INR3.5b in 3Q). Overall pool of NSL (NNPL + OSRL + other stressed loans) increased 2% QoQ. The bank sold 2 accounts worth INR1.89b to ARCs (NAV: INR1.13b; sale value: INR1b). Corporate slippages had a lumpy account contribution of INR13b related to Metals.
* FY17 highlights:
(1) RAM portfolio grew 15% YoY, led by robust growth in retail (+23% YoY). (2) CASA deposits increased 18% YoY, led by strong growth in SA deposits (+28%). Avg. daily CASA ratio improved 550bp YoY to 34.4%.
* Valuation and view:
We are enthused with moderation in corporate slippages and higher recoveries in the quarter. Balance sheet recalibration is evident from stronger focus on RAM portfolio. However, ageing of the NPL portfolio and elevated credit costs will pressurize earnings. Resultantly, we expect RoA/RoE to remain sub-optimal at 0.5/10%. We cut earnings by 15-20% for FY18/19E to factor in pressure on NIMs and higher credit costs. Tier 1 ratio stands at 9%. Maintain Neutral with a TP of INR174 (0.5x FY19 BV).
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