Union Bank of India's Q4FY19 results (Neutral) - A weak quarter

Q4FY19 result highlights

• Union reported a huge loss of Rs33bn driven by higher provisions, one-off ESOP costs and pension provisions. The bank had a divergence in provisions of Rs22.8bn because their provisioning on some large accounts was lower than peers. The entire divergence was accounted for in 4Q19.
• Loan growth remained weak growing 3% yoy and 2% qoq. While retail loan growth was strong at 15% yoy, wholesale loans declined due to run down in the overseas book that declined 43% yoy.
• NIMs improved 4bps qoq to 2.27% due to run down of lower yielding foreign loans. NII grew 19% yoy and 4% qoq.
• Slippage rose qoq to 33bn from 30bn and remained high at 4.5% of loans. The largest account that slipped was IL&FS Tamil Nadu Power. While slippage rose, due to a high write off, GNPAs declined 3% qoq. Mgmt expects MSME slippage to remain high in the next few quarters.
• Non-interest income ex trading declined 20% yoy but grew 10% qoq.
• Operating expenses rose sharply by 20% yoy and 27% qoq due to one-off ESOP discounting charges and pension provisions totalling to Rs2.1bn.
• Core PPOP declined 17% yoy and 9% qoq and remains weak.
• Credit cost rose sharply to 7.9% from 2.9% qoq due to higher divergence-related ageing provisions. PCR improved from 51% to 58%.
• The bank had tax write-backs of Rs6.6bn.
• CET1 remains low at 8% despite capital infusion from government.

Valuation and view

With loss in 4Q, consistently weak earnings and low CET1, the outlook remains weak. The bank has guided to RoA of 0.3% in FY20 and 1% in FY21. The bank is planning to raise more equity but dilution at below book valuation is a negative. We maintain Neutral despite cheap valuations. We roll over base and raise TP to Rs82 at 0.5xPBV FY21E.