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Buy Union Bank of India Ltd For Target Rs.55

Operating performance showing recovery signs

Slippages remain elevated; higher PCR/recovery outlook provides comfort

* UNBK reported healthy operating performance, supported by higher other income and improving margin trajectory, despite sluggish business growth. Domestic NIM expanded by 71bp QoQ to 3.11%.

* Slippages stood elevated (~4.8% annualized), led by higher slippages in the MSME and two large corporate accounts slipping in 1QFY22. However, higher write-offs and upgradations aided stable asset quality on a sequential basis.

* SMA-2 overdue stood at 3.7% of loans, and restructured book stood at 2.7% of net loans. We conservatively estimate RoA/RoE of 0.6%/11.4% by FY23E. We resume coverage with a Buy rating.

Improving earnings traction; slippages stay elevated, with PCR healthy ~69%

* UNBK reported a PAT of INR11.8b (+255% YoY), supported by higher treasury gains of INR11.1b and recovery from written of account of INR3.3b, even as total provisions stood elevated ~INR35b.

* NII grew 9.5% YoY (+30% QoQ) to INR70.1b, while domestic NIM improved by 71bp QoQ to 3.11%.

* Core fee income grew 41% YoY, supported by a benign base, but fell 30% QoQ, impacted by low business volumes. Other income grew 98% YoY (fell 36% QoQ) to ~INR29b, led by higher treasury gains (INR11.1b) and recovery from written off assets (INR3.3b).

* Opex grew ~20% YoY to ~INR46.1b. PPOP grew strongly at 31% YoY to INR53b. C/I ratio improved by ~150bp QoQ to 46.5%.

* On the business front, loan growth was flat YoY (down ~1% QoQ) ~INR5.8t, with Retail up 10.6% YoY (flat QoQ), MSME declined by ~4% QoQ, and Agri/Corporate fell by 1% QoQ. Deposit growth stood weak ~2% YoY (down ~2% QoQ), while CASA grew 11% YoY. CASA mix stood ~36.4% (flat QoQ).

* Fresh slippages stood elevated at INR70.5b (annualized at 4.8% of loans), led by higher slippages from the MSME portfolio (INR31.4b) and two large Corporate accounts slipping in 1QFY22. However, higher write-offs and upgradations led to a stable asset quality on a sequential basis. GNPA ratio declined by 14bp QoQ to 13.6%, while NNPA ratio increased by 7bp QoQ to ~4.7%. PCR ratio stood at 68.7% (v/s 69.6% in FY21).

* SMA-2 overdue stood at 3.7% of loans (while SMA-2 over INR50m stands at 1.7%). Total restructured loans stood at 2.7% of net loans.

Highlights from the management commentary

* Recovery pipeline in FY22 remains strong at INR130b, which includes INR40b from NCLT accounts. Accounts under NCLT resolution stand at 96, with a total exposure of ~INR56.5b.

* The management expects business growth of 8-10% YoY. It also guided at a slippage ratio/credit cost of 2.5%/2%.

Valuation and view

UNBK reported healthy earnings performance, supported by high treasury gains and improving margin, despite tepid business growth. The bank expects growth to pick up, led by the RAM segments, while the Corporate book would witness a gradual recovery.

Asset quality was largely stable, despite higher slippages, but was supported by higher write-offs and upgradations. SMA-2 overdue stood at 3.7% of loans, and restructured book at 2.7% of net loans. We expect slippages to moderate, mainly from 2HFY22. We project credit cost at 2.3%/1.9% in FY22E/FY23E. We estimate RoA/RoE of 0.6%/11.4% by FY23E. The bank is trading at reasonable valuations of 0.5x FY23E ABV. We resume coverage with a Buy rating and a TP of INR55/share (0.7x FY23E ABV).

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