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Business growth to remain modest

Healthy PCR and recovery outlook provide comfort on asset quality

We hosted a roadshow for the Union Bank of India, which was represented by MD and CEO, Mr Rajkiran Rai G; Executive Director, Mr Nitesh Ranjan; CFO, Mr Prafulla Samal; and other members of the senior management team. The management highlighted the progress made on the overall book and shared its outlook on the way ahead. Here are the key takeaways:

Macro related

* India is expected to post the fastest economic growth among the major economies.

* Credit growth is showing signs of revival, with credit growth at ~7%.

* The Retail, MSME, and Agri book is driving overall demand, with traction likely to remain healthy.

* Overall, systemic credit growth is likely to be 7–8%/12–13% for FY22/FY23

Asset quality related

* The recovery environment has improved significantly in the current quarter. Thus, the bank expects to recover ~INR60b in 2HFY22. Thus, the total reduction is expected to be ~INR160b in FY22.

* The bank has already recovered ~INR30b of the slippage in 1HFY22.

* The bank has guided for net slippage to be less than INR140b for FY22E. The total slippage for FY22 is likely to be 2–2.5%.

* The Air India account (which was in SMA-2) has started to make payments. Thus, the SMA-2 book is likely to decline further. The bank was carrying PCR of 35% on the same, which is likely to get released and utilized for other accounts.

* Overall, the target is to bring down the NNPA ratio to <3% over the medium term.

* The bank is looking to transfer INR100–120b to NARCL.

* NBFC book: The AAA rated stand at 54%, AA rated at 30%, and A rated at 13%; thus, 93–94% of the book is rated A & above. Furthermore, state/central NBFC stands at 32%, while NBFC backed by PSUs stands at 14%.

P&L and balance sheet related

* The advances book is likely to grow 6–8% for FY22, driven by Retail and Agri, which would continue to show strong traction of 12–13%.

* Within the Retail segment, Home Loans and Vehicle Loans would be the primary focus, while banks also seek entry into the Personal Loans segment.

* The MSME book is showing signs of revival and is likely to grow at a healthy pace.

* The corporate book is likely to see a gradual uptick, with a strong sanction pipeline of INR300b, of which ~INR200b is likely to get disbursed in the current quarter. Proposals are being received from LRD, Real Estate, Steel, and Infra Projects, among others. Overall corporate growth is likely to be 4–5%.

* The quarterly run-rate of operating profit is likely to be ~INR50b.

* Credit costs are likely to remain at 2% for FY22, 1.25–1.5% for FY23, and 1– 1.25% for FY24.

* The bank targets RoA of 0.4–0.5% for FY22E, 0.7–0.75% for FY23E, and 0.9–1% for FY24E.

* The bank’s capital position seems adequate, and internal accruals would be sufficient to take care of growth opportunities.

Valuation and view

* UNBK reported healthy earnings, supported by recovery from the DHFL resolution. It also posted an improvement in asset quality, aided by higher write-offs and strong recoveries/upgrades. However, loan growth remained muted due to decline in corporate advances, while modest growth recovery was seen in the Retail, Agri, and MSME (RAM) segment. Overall, the management indicated asset quality would continue to improve, aided by moderation in the slippage trend and higher recoveries from stressed asset resolutions. Furthermore, SMA-2 overdue declined to 2.3% of loans, while the restructured portfolio increased to 3.7% of loans. Thus, we estimate credit costs at 2.2%/1.9% for FY22E/FY23E and RoA/RoE at 0.8%/14.2% by FY24E. We maintain Buy, with Target Price of INR65 (0.7x Sep’21 ABV).

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