IGI Logo

Strong capital adequacy a lever for growth

We initiate coverage on UNBK with ‘BUY’ given the consistent improvement in earnings quality as reflected by (1) steady stress reduction leading to material decline in provisions, (2) lower NIM fall due to profitability focus (3) improving fee to asset ratio and (4) enhancing capital adequacy (currently best-in-class). While GNPA has materially reduced over FY22-9MFY25 from 11.1% to 3.9%, it could further fall, suggesting that GNPA decline over FY25-27E may be higher than peers. With all wage-related provisions accounted, opex should not see any negative surprises and may grow in tandem with loans; we expect core RoA/RoE of 0.9%/12% to sustain over the medium term. Valuation is attractive at 0.7x on Mar’27 ABV suggesting a 23% discount to SBI. We assign a multiple of 0.9x on Mar’27 ABV to arrive at a TP of Rs140. Initiate with ‘BUY’

? Increasing share of higher yielding RAM: RAM share has increased from ~53% in Q4FY22 to ~55% in Q3FY25. Apart from agri, the bank is also focusing on the higher yielding segment of education loans and LAP within retail. Due to quality underwriting, GNPA in education loans is controlled. PL share is 1.2% of loans and exposure may not increase due to recent asset quality challenges. Corporate growth has been lower as slower capex spend by the government has resulted increased competition and predatory pricing. We expect an overall loan/deposit CAGR of 10%/10% over FY25-27E with an LDR of ~76%. Over FY25-27E, NIM could be cushioned by (1) discontinuance of special deposit scheme with higher interest, (2) implementation of Project LEAP to retain and shore up CASA (3) reduction in high cost wholesale deposits.

? Superior fees & lower opex growth to cushion core RoA: Over FY22-24, fee to assets ratio improved from 54bps to 68bps (class leading) led by (1) consistent rise in PSLC fees, (2) leveraging custodian facilities to FPIs, (3) timely renewal and review of term loans, leading to better processing fees (4) more focus on transaction banking and TPP income, and (5) deeper relationships with existing corporates for fee-based income and TPP. As all wage hikes have been accounted for, opex growth should mirror loan growth. We expect core RoA/RoE of 0.9%/12% to sustain over FY25-27E

? Higher GNPA reduction likely vs peers: After the merger with Corporation Bank and Andhra Bank, GNPA worsened to 14.95% (Q1FY21). However, over FY22-24, GNPA has materially reduced from 11.11% to 4.76% due to reduction in slippage ratio and increase in recoveries. As a result, provisions declined from 212bps to 83bps. Although, GNPA has reduced significantly, it is still higher at 3.85%, suggesting fall over FY25-27E could be material compared to peers. We expect GNPA to reduce from 3.6% to 2.7% in FY25-27E.

? Best-in-class capital adequacy: UNBK’s CET-1 at 14% is higher to peers while capital utilization has been more conservative which may protect future asset quality. Gap between loan and RWA CAGR is wider to peers. Over Q4FY22 to Q3FY25, loan CAGR for was 12.8% although RWA CAGR was 8.2%. Adjusting for equity raise over FY22 and FY24 of ~Rs94bn, CET-1 accretion has been healthier due to consistent reduction in DTA and normalization of pension expense after FY22. We expect CET-1 in FY25E to be between 14.5-15.0%.

Above views are of the author and not of the website kindly read disclaimer