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Steady quarter; lower provisions drive earnings beat

Asset quality improves further

* Union Bank of India (UNBK) reported a steady 90% YoY growth in PAT to INR35b (19% beat), driven by lower provisions (down 12% QoQ).

* NII grew 10% YoY to INR91.3b (in line), aided by NIM increase of 5bp QoQ to 3.18%.

* Loan book grew 10.5% YoY/4.3% QoQ, while deposits grew 9% YoY/1% QoQ. CD ratio thus increased 234bp QoQ to 70.6%.

* Asset quality ratios improved with GNPA/NNPA ratios at 6.4%/1.3%. PCR improved 90bp QoQ to ~80.7% in 2QFY24. Restructured book declined to 1.7% of loans, while SMA book improved to 52bp.

* We increase our FY24/25E earnings estimates by 7%/8% and estimate RoA/RoE of 1.1%/17.5% by FY25. We retain our BUY rating on the stock with a TP of INR125.

Margin improves 5bp QoQ to 3.18%; PCR improves 90bp to 80.7%

* UNBK reported 90% YoY growth in 2QFY24 PAT to INR35b (19% beat), driven by 57% YoY decline in provisions to INR17.7b (32% lower than MOFSLe).

* NII grew 10% YoY to INR91b (up 3% QoQ, in line), driven by a 5bp QoQ increase in NIM to 3.18%. Other income grew 13% YoY with treasury gain of INR6.8b. Thus, total income grew 11% YoY to INR128.2b.

* Operating expenses grew 12% YoY to INR56b (5% below MOFSLe). PPoP grew 10% YoY to INR72b (6% beat). C/I ratio remains broadly flat at 43.7%.

* Advances grew 10.5% YoY to INR8t, driven by growth in both the RAM segment and Overseas credit, which experienced a YoY growth of 15% and 22%, respectively. Deposits grew 9% YoY (1% QoQ) with CASA deposits increasing 4.4% YoY, leading to flattish CASA ratio at 34.7%.

* Fresh slippages moderated to INR26.3b (1.4% annualized), which along with healthy recoveries/upgrades and write-offs resulted in an improvement in asset quality ratios. GNPA/NNPA ratio thus improved 96bp/28bp QoQ to 6.4%/1.3%, while PCR improved to 80.7%.

* The total SMA book (~INR44b) stood at 0.52% of loans vs. 0.51% in 1QFY24. The total restructured loans declined to 1.7% of loans

Highlights from the management commentary

* Margins stood at 3.14% in 2QFY24 and the bank expects it to be ~3% by the end of FY24.

* In 1HFY24, INR1.1t has been repriced under MCLR and the bank expects ~INR1.2t will be repriced under MCLR in 2HFY24.

* The bank has provided GNPA/NNPA guidance of below 6%/1% for FY24.

* The bank plans to move to the new tax regime in FY25 which will support net earnings next year.

Valuation and view

UNBK reported a robust quarter as earnings beat estimates, led by higher treasury gains, healthy margins, and lower provisions. Loan growth remains steady while deposits growth remains flattish with CASA mix holding largely flat. Fresh slippages moderated, which along with healthy recoveries and upgrades, supported the asset quality. A low SMA book (0.52%) and controlled restructuring (1.7%) provide a healthy outlook on asset quality. We increase our FY24E/25E earnings estimates by 7%/8% and estimate RoA/RoE of 1.1%/17.5% by FY25. We reiterate our BUY rating with a TP of INR125 (premised on 1.0x FY25E ABV).

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