Buy Union Bank of India Ltd For Target Rs. 135 By Motilal Oswal Financial Services Ltd
Modest operating performance; NIMs decline 15bp QoQ Slippage ratio increases to 2.4%
* Union Bank of India (UNBK) reported 2QFY25 PAT of INR47.2b (34.4% YoY, 27% beat) driven by healthy other income and lower provisions (amid the reversal of standard assets provision).
* NII was flat YoY at INR90.5b (down 3.9% QoQ; 5% miss). NIMs moderated sharply by 15bp QoQ to 2.9% during the quarter.
* Loan book grew at 11.6% YoY/2.1% QoQ while deposits grew 9.2% YoY/1.5% QoQ. CD ratio, thus, increased slightly to 72.2%.
* Fresh slippages increased sharply to INR52.2b due to one large corporate account in the PSU sector. GNPA ratio declined 18bp QoQ to 4.36%, while NNPA ratio increased 8bp QoQ to 0.98%. PCR declined 255bp QoQ to 78.4%.
* We cut our earnings for FY26 estimate by 4.7% and estimate RoA/RoE of 1.1%/15.4% by FY26. Reiterate BUY with a TP of INR135 (based on 0.9x FY26E ABV).
Business growth modest; PCR declines slightly
* UNBK reported 34.4% YoY growth in PAT to INR47.2b (27% beat) driven by healthy other income and lower provisions (amid the reversal of standard assets provision). In 1HFY25, earnings grew 24% YoY to INR84b and we estimate 2HFY25 earnings to grow 4% YoY to INR72b.
* NII was flat YoY at INR90.5b (down 3.9% QoQ; 5% miss). NIMs moderated 15bp QoQ to 2.9% in 2QFY25 due to adjustment in penal charges.
* Other income grew 44.2% YoY (28% beat), backed by better recoveries from NPAs, and treasury gain stood at INR10.3b vs INR7b in 1QFY25. Total income, thus, grew 12% YoY to INR143.8b.
* Operating expenses grew 11.8% YoY to INR62.6b (in line). PPoP grew 12.4% YoY to INR81b (7% beat). C/I ratio, thus, moderated 51bp QoQ to 43.6%.
* Advances grew 11.6% YoY/2.1% QoQ to INR8.97t. Retail book grew 14.3% YoY (5.5% QoQ), while corporate growth was muted. Within retail, home loan and education loan grew healthy at 4.3% QoQ and 6.5% QoQ, respectively. Deposit base grew (9.2% YoY/ 1.5% QoQ), with CASA ratio moderating 68bp QoQ to 32.7%.
* Fresh slippages increased sharply to INR52.2b vs INR23.2b in 1Q, up 98% YoY/125% QoQ, due to one large ticket size book that slipped. GNPA ratio declined 18bp QoQ to 4.36%, while NNPA ratio increased 8bp QoQ to 0.98%. PCR declined 255bp QoQ to 78.4%. SMA pool stood elevated at 0.83% (0.78% in 1QFY25).
* UNBK reversed the standard provisions of INR10.3b, out of which one large account had slipped and another was classified as SMA. SMA book increased to ~INR74.8b while restructured portfolio declined to 1.2%
Highlights from the management commentary
* Loans are expected at ~11-13% YoY and Deposits at 9-11% YoY.
* Adjustments in penal charges and drop in dummy ledger recovery led to moderation in margins.
* 11bp drop in margins was due to penal interest. The impact of penal interest is expected to be higher in 3Q compared to 1Q..
* Slippages increased due to a single large ticket size account (PSU entity) that defaulted in the current quarter.
Valuation and view
UNBK reported a mixed quarter, wherein healthy other income and lower provisions led to earnings beat. However, margins moderated 15bp QoQ and slippages stood elevated. Deposit growth was flat, with CASA ratio moderating further. Loan growth was led by retail, with a CD ratio of 72.2%. The management has guided for NIMs in the range of 2.8-3%; however, penal charges will continue to impact margins. SMA book increased due to one large account that was transferred to SMA in the current quarter. Slippages were high due to one large account; nonetheless, healthy recoveries and a consistent decline in restructured assets (1.2%) provide a healthy outlook for asset quality. However, we remain watchful for slippages in subsequent quarters. We cut our earnings for FY26 estimate by 4.7% and estimate RoA/RoE of 1.1%/15.4% by FY26. Reiterate BUY with a TP of INR135 (based on 0.9x FY26E ABV).
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