FREE

Union Bank of India's Q1FY20 results (Neutral) - High MSME slippage, CET1 falls below 8%

Q1FY20 Results  

• Union’s PAT of Rs2bn was an improvement over the loss in 4Q19 and a growth of 76% yoy, on a low base. However, profitability remains weak with a decline in NIMs, slippage ratio remaining high at 3.9% and zero yoy growth in loans.
• Loan growth was nil yoy. While domestic loans grew 3% yoy, overseas loans declined 26%. Retail loans grew 16% yoy.
• NIMs declined sharply by 15bps qoq to 2.12% due to higher cost of funds that rose 30bps qoq. NII declined 4% yoy and 3% qoq.
• Slippage fell qoq from Rs33bn to Rs30.9bn but still remains uncomfortably high at 3.9% of lagged loans. MSME slippage rose sharply by 74% qoq while agri slippage rose 20% qoq. MSME slippage shot up as the RBI dispensation on MSME loans ended. Corporate slippage declined qoq. GNPAs account for 15.2% of loans, amongst the highest in the sector. The GNPA ratio rose 20bps qoq. Agri NPLs are 10% while MSME NPLs are 13.4% of MSME loans. NPLs in the Mudra scheme are 9% of Mudra loans.
• In addition to NPLs, Union has standard stress loans of 2.7% of total loans amounting to Rs80bn. The bank also has security receipts of Rs9.2bn.
• Non-interest income ex trading declined 27% yoy.
• Operating expenses declined 7% yoy and 24% qoq.
• Core PPOP declined 14% yoy.
• Credit cost fell sharply qoq as last quarter had high divergence related provisions. PCR fell from 58% to 56%.
• CET1 remains low at 7.87%.

Valuation and view

With high standard stress at 2.7% of loans, weak RoA and CET1 below 8%, we do not see positive triggers for the stock. We maintain Neutral given cheap valuations. Management guides to an RoA of 0.2% by end-year. Mgmt expects recovery of Rs35bn from Essar Steel, Bhushan Power and Alok. The bank has Rs28bn exposure to DHFL which is SMA1. According to the CEO if DHFL resolution does not happen by end Q2, the account will slip. Our earnings remain unchanged. We cut TP to Rs60 as we build in a lower fair multiple of 0.3x PBV (versus 0.45x earlier) to account for the capital shortage.