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One-off opex dents earnings; guides for RoA of >1%

Asset quality ratio improves

* Union Bank of India (UNBK) reported 19% YoY growth in PAT at INR33b (14% miss) in 4QFY24 as opex increased 13.7% YoY to INR76b (24% higher than MOFSLe).

* NII grew 14.4% YoY to INR94.4b (in line). NIMs stood broadly stable, with a 1bp QoQ increase to 3.09%.

* Loan book grew 14% YoY/1% QoQ. Deposits grew 9.3% YoY/4.2% QoQ. The CD ratio, thus, moderated 224bp QoQ to 71.3%.

* Asset quality ratios improved slightly, with GNPA/NNPA ratios declining by 7bp/5bp YoY to 4.76% /1.03%. However, slippages increased during the quarter to INR33b from INR26.8b in 3QFY24.

* We cut our FY25/FY26 EPS estimates by 2.1-2.2% and estimate RoA/RoE of 1.1%/16.3% by FY26. Retain BUY with a revised TP of INR165.

Loan growth moderates; margins broadly stable at 3.09%

* UNBK reported 19% YoY growth in PAT at INR33b (14% miss) due to higher opex (mostly wage related). For FY24, PAT rose 62% YoY to INR136.5b.

* NII grew 14.4% YoY to INR94.4b (in line). NIMs were broadly stable, with a 1bp QoQ increase to 3.09% (above the management’s guidance of 3%).

* Other income grew 24.7% QoQ (20% beat) as treasury gains remained healthy at INR7.8b, besides an income tax refund of INR4.97b. Total income, thus, increased by 4.6% YoY to INR141.4b.

* Operating expenses grew 13.7% YoY to INR76b (24% higher than our estimate). Thus, PPoP declined 4.3% YoY to INR65b (10% miss). The C/I ratio thus increased to 53.8%.

* Advances saw a moderate growth sequentially at 14% YoY/1% QoQ to INR8.7t. Retail book grew 11% YoY (2.3% QoQ) and commercial book grew 15% YoY (0.7% QoQ). Deposits grew 9.3% YoY (4.2% QoQ), with CASA deposits increasing 4.1% YoY, leading to 20bp QoQ moderation in the domestic CASA ratio to 34.2%.

* 4Q slippages rose to INR33b vs. INR26.8b in 3Q. GNPA/NNPA ratios improved 7bp/5bp YoY to 4.76% /1.03%. PCR rose 76bpp QoQ to 79.1%.

*  SMA book remained under control at ~INR32.4b due to a decline in SMA-0 bucket. Restructured loans declined to 1.5% of loans.

Highlights from the management commentary

* Employee cost has gone up as the bank has made pension/gratuity provisions amounting to ~INR13b during the quarter. Wage provisions stood at INR1.63b, which impacted the operating profits in 4QFY24.

* The bank guides for >1% of RoA with NIMs of 2.8-3%. The bank aims to surpass its RoA guidance.

* Employee expenses are expected to rise by INR 3.3b per quarter, with a projected HR cost escalation of 6-7% YoY. Consequently, the ongoing monthly staff expenses are estimated to range around INR11.5-12b.

Valuation and view

UNBK reported a mixed quarter characterized by healthy revenue growth and lowerthan-expected provisions; however, higher opex led to a miss in earnings. NIMs remained broadly stable and above the guided range. Continued improvements in the CD ratio and residual re-pricing of MCLR loans will support NIMs; the management has guided for the NIM range of 2.8-3%. Slippages increased, while recoveries and upgrades declined sequentially. However, controlled SMA book and a consistent decline in restructured assets (1.5%) provide a healthy outlook for asset quality. We cut our FY25/FY26 EPS estimates by ~2% and estimate RoA/RoE of 1.1%/16.3% by FY26. We reiterate our BUY rating with a revised TP of INR165 (premised on 1x FY26E ABV).

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