Union Bank of India's Q2FY19 results (Neutral) - Some relief as slippages moderate

Q2FY19 results highlights

• Union’s PAT of Rs1.4bn declined 109% yoy but grew 7% qoq. Profit was higher than our estimate due to lower MTM charge. While the bank posted a small core profit of Rs 343M versus core PBT losses since 3Q16, profitability remains weak, provisioning cover remains low and CET-1 is below the mark of 8% required by March 2019.
• Loan growth decelerated with loans remaining flat yoy. While retail, agri, MSME grew well, wholesale loans remained a drag declining yoy and qoq.
• NIMs declined due to no lumpy NCLT recoveries in 2Q, unlike in 1Q when Bhushan Steel contributed Rs2.74bn to NII. NIM declined 8bps qoq to 2.18%. Core NIMs ex recoveries were higher qoq due to lower slippage and stable cost of funds. NII grew 7% yoy and -5% qoq.
• Slippage of Rs26.7bn was substantially lower than Rs46.5bn in 1Q. Agri and MSME slippages grew sharply by 47% and 55% qoq but corporate and rertail slippages declined. Recoveries and upgrades matched the high levels of 1Q even without lumpy recoveries. GNPAs declined 2% qoq to 15.74%. Total stress loans remain high at 19.9% of loans.
• Total non-interest income declined 26% yoy and qoq pulled down by lower trading gains. Recovery income and fees grew strongly at 17% yoy and 91% yoy.
• Credit cost declined to 2.3% of loans from 2.5% qoq but remains high. Provisioning cover ex technical write-offs declined to 47% from 50% qoq.
• CET1 remains low at 7.54% against 8% required by March 2019. The bank has plans to raise upto Rs68bn of CET1 and believes the government will infuse the required capital to fund 10% loan growth and to meet BASEL norms.

Valuation and view

While earnings improved sequentially profitability still remains weak. More importantly the PCR ex technical write-offs has declined to below 50%. Also CET1 falls short of the requirement of 8% by March 2019. While the government is likely to infuse some capital we do not know if it will be of the order of Rs68bn that the bank needs. Further the dilution will be big given the below book valuation. With capital shortage and low PCR, we maintain Neutral despite cheap valuations. We are downgrading our target multiple further to 0.3x from 0.35x earlier. Our new TP is Rs71 versus Rs90 earlier.