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Business growth and asset quality outlook encouraging

Focused approach towards the RAM segment; loan growth to be 10-12%

The management’s focus remains on growing the RAM segment, which is delivering a healthy growth and aspires to grow by ~15%. The Corporate segment is witnessing a healthy uptick (up 13% YoY in 1QFY23), and the momentum is likely to sustain, led by strong traction in Steel, Power, Pharma, and the HAM sector. It has opened 250 Retail loan points, 125 MSME loan points (loans up to INR500m), mid-Corporate branches (loans of INR500m-INR2.5b), and 13 large Corporate branches (loans of over INR2.5b) to primarily focus on ramping up loan growth. Overall, the growth in advances is likely to be 10-12% in FY23, with a focus on improving TAT (to pare down the same significantly from seven days at present) and the quality of underwriting.

Healthy mix of floating loans; NIMs likely to be 3-3.1% in FY23

Around 33% of loans are inked to EBLR (30% repo and 3% others – interest hike is passed on within two-to-three days), while another ~52% is linked to MCLR, which gets re-priced on the reset date. The bulk of the Retail and MSME book is linked to EBLR, thereby supporting yields. The bank is sitting on excess liquidity of 6-7%. Deposit growth is likely to be 8-9%, with a double-digit growth in CASA deposits. Growth in Retail Term Deposits is also picking up, and the momentum is likely to sustain. Overall, NIM is likely to be in the 3-3.1% range in FY23.

GNPA/NNPA to be less than 9%/3%; credit cost to be ~1.75% in FY23

Slippages in the MSME segment are falling and are likely to normalize going forward as cash flows improve. Total restructuring book stands at INR227b (~3% of loans – Retail/MSME at INR92b/INR42b), with a PCR of ~10%. In the above book, ~22% is already NPA, while 6% is SMA. The ELCGS book stands at INR140b, of which only 1-1.5% has so far slipped. The total SMA book has reduced to ~4.6% in Jun’22 v/s ~13.3% in Jun’21. The bank is looking to pare down the GNPA/NNPA ratio to less than 9%/3% by FY23, with a long-term aspiration to pare down the NNPA ratio to less than 1%. Overall, the bank is expecting recoveries of INR150b in FY23. Credit cost is likely to moderate to 1.75% in FY23.

Others

*  It has entered into a co-lending model by partnering with four-to-five NBFCs and is looking to grow this book with a focus on Housing, LAP, and MSME loans.

*  The management is consciously not looking to raise the mix of Unsecured loans.

* It is targeting a RoA of ~1% over the next two-to-three years.

* The growth in interest and exchange income is likely to offset the modest treasury income from sale of investments. * The bank did not incur any MTM losses in 1Q and is unlikely to witness any losses in 2QFY23 as well.

* It will look to revisit the lower tax rate in FY24, based on the quantum of DTA and accumulated losses.

* The bank is offering slightly higher rates on Non-Callable Bulk Term Deposits, which is keeping the cost of deposits slightly higher as compared to its peers.

* The board has approved the capital raise. UNBK will look to raise capital at an opportune time (mostly by 4QFY23). It recently raised AT1 bonds of INR13b.

Valuation and view

UNBK reported a healthy 1QFY23, with earnings driven by healthy NII and other income, even as provision and OPEX stood elevated, which is likely to moderate going forward. Fresh slippages moderated on a sequential basis, which, coupled with a low SMA book (0.5%) and controlled restructuring, provides a better outlook on asset quality. Loan growth picked up and was supported by all segments – Corporate, Agri, Retail, and MSME. We expect a RoA/RoE of 0.7%/12.3% by FY24. We maintain our Buy rating with a TP of INR50 (premised on 0.6x FY24E ABV).

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