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Asset quality improves further

-      Union Bank of India (UNBK) reported a healthy 60% YoY growth in PAT at INR35.9b (in line), driven by controlled provisions, healthy other income, and lower opex.

-      NII grew 6% YoY to INR91.7b (3% miss) as NIMs moderated 10bp to 3.08%.

-      Loan book grew strongly by 14% YoY/7.3% QoQ, led by robust growth in the Corporate and Agri segments. Deposits grew 10% YoY/3% QoQ. The CD ratio, thus, increased to 73.5% (up 2.9% QoQ).

-      Asset quality ratios improved notably, with GNPA/NNPA ratios declining by 155bp/22bp YoY to 4.8% /1.1%. Restructured book declined to 1.6%.

-      We maintain our FY24/FY25 earnings estimates and expect RoA/RoE of 1.1%/17.6% by FY25. Retain BUY with a revised TP of INR165.

Margins decline 10bp QoQ to 3.08%; RoA sustains at 1.07%

-      UNBK reported 60% YoY growth in PAT at INR35.9b (in line) in 3QFY24, driven by a 42% YoY decline in provisions to INR17.5b (8% lower than our estimate). For 9MFY24, PAT rose 7.4% YoY to INR434b.

-      NII grew 6% YoY to INR91.7b (flat QoQ, 3% miss) as margin declined 10bpp QoQ to 3.08% (still above the management’s guidance of 3%). Other income grew 13% YoY as treasury gains remained healthy at INR6.1b. Total income, thus, increased by 9% YoY to INR129.4b.

-      Operating expenses grew 7% YoY to INR57b (4% below our estimate). PPoP grew 10% YoY to INR73b (in line). C/I ratio remains broadly flat at 43.8%.

-      Advances jumped 14% YoY/7.3% QoQ to INR8.6t, supported by traction across Corporate, Agri and Overseas credit. Deposits grew 10% YoY (3.1% QoQ), with CASA deposits increasing 5.6% YoY, leading to a slight moderation in the domestic CASA ratio to 34.4%.

-      Fresh slippages were flat at INR26.8b, which, along with healthy recoveries/upgrades and write-offs, resulted in an improvement in asset quality ratios. GNPA/NNPA ratios improved 155bp/22bp YoY to 4.8%/1.1%, while PCR decreased 230bpp QoQ to 78.4%.

-      SMA book increased to ~INR50.8b due to an increase in SMA-0 bucket. Restructured loans declined to 1.6% of loans.

Highlights from the management commentary

-      UNBK has earlier made wage provisions to reflect a 15% wage hike, which has now increased to 17%. Hence, the bank in 3Q provided INR2.33b for 11 months. The bank has been providing INR1.3b per month for the extra wage provision, i.e., INR3.9b in 3Q.

-      The bank expects to sustain margins at ~3%; the bank’s current margins are already above the guided range.

-      Advances growth is expected to be 10-12% and deposits growth is expected to be around ~8-10%.

Valuation and view

UNBK reported a steady quarter characterized by healthy revenue, loan growth, and controlled provisions. NIMs moderated slightly but remained above the guided range. Continued improvements in the CD ratio and residual re-pricing of MCLR loans will keep NIMs trend steady over the coming quarters. Fresh slippages remained well under control, while healthy recoveries and upgrades resulted in an improvement in asset quality ratios. Barring some increase in SMA-0 bucket, asset quality was healthy. A consistent decline in restructured assets (1.6%) provides a healthy outlook on asset quality. We largely maintain our earnings estimates and expect FY25 RoA/RoE of 1.1%/17.6%. We reiterate our BUY rating with a revised TP of INR165 (premised on 1.1x Sep’25E ABV).

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