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Sub-par performance among PSBs

Union Bank reported an 11% miss on PAT at Rs33bn (vs Emkay est.: Rs37bn) owing to impact of wage revision (Rs13.3bn) and tax expenses, which overrode the benefits from higher treasury income and reversal of NPI provisions. NIM was largely stable QoQ at 3.1%, unlike for peers who reported sequential improvement. Fresh slippages were slightly higher at Rs33bn/1.7% of loans due to seasonal stress in the agri portfolio, but higher recoveries caused a decline of 7bps QoQ in the GNPA ratio to 4.8%; specific PCR stood at a healthy 79%. Project financing accounts for ~28% of overall loans, with majority of the projects (~68%) already completed; hence, the bank does not expect any major impact from the RBI’s new draft IRACP guidelines. Factoring-in the healthy NIM trajectory/lower tax rate (once it moves to the new tax regime) as well as the contained LLP, we expect the bank to report 1-1.1% RoA/15-16% RoE over FY25-27E. We revise up our TP to Rs150 (from Rs135), valuing the bank at 1x FY26E ABV. However, we retain REDUCE on the stock. Our preferred picks among PSBs are Indian Bank, BOB, SBI, and Canara Bank

Steady margins, unlike peers reporting expansion in NIMs

Union Bank has delivered healthy credit growth at 14% YoY, mainly on account of strong traction in the agri portfolio. Retail growth @11% YoY/2% QoQ continues to moderate, as mortgage growth takes a back seat. Deposit growth picked up in 4Q at 9% YoY/4% QoQ, leading to contraction in LDR to 71% and thus to steady NIMs at 3.1%, unlike peers who have reported an improvement in NIMs. Bank guides to grow its loan book at 11- 13%, with RAM constituting 55% of total loans; it envisages to grow its deposits at 9- 11% (by targeting SURU centers) in FY25. The bank expects some liquidity stress going forward and, after taking into consideration its MCLR linked book (which still has further scope for upward revision), it has given a conservative NIM guidance of 2.8-3%.

Agri slippages push overall slippages upward After steady moderation since the last 2 quarters, gross slippages

were slightly higher at Rs33bn/1.7% of loans in Q4FY24 due to stress in the agri portfolio (based on seasonality factors), but higher recoveries led to a decline of 7bps QoQ in the GNPA ratio to 4.8%, with specific PCR standing tall at 79%. The bank still has a higher restructured pool, at 1.5% of loans, and should look to run it off at the earliest. The bank optimistically guides for a GNPA of less than 2% for FY25, backed by contained slippages and higher recoveries. The bank has made AIF provisions of Rs0.2bn during the quarter.

We retain REDUCE

Factoring-in the healthy NIM trajectory/lower tax rate (once it moves to new tax regime) and contained LLP, we expect Bank to report 1-1.1% RoA/15%-16% RoE over FY25-27E. We revise up our TP to Rs150 (from Rs135), valuing the bank at 1x FY26E ABV. However, we retain REDUCE on the stock. Our preferred picks among PSBs are Indian Bank, BOB, SBI, and Canara Bank. Key risks for Union Bank: Emerging asset-quality risk in the SME space, and growth moderation as macros deteriorate.

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