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Union Bank of India's Q3FY19 results (Neutral) - A weak quarter

Q3FY19 result highlights

• Union’s PAT of Rs1.5bn was significantly lower than our estimate of Rs6bn driven by lower loan growth, higher opex and higher credit cost. Excluding trading gains and write back of investment depreciation the bank reported a pre-tax loss of Rs5.3bn versus profit of Rs1.8bn qoq.
• Loan growth remained weak declining marginally yoy and qoq. While retail loan growth was strong at 22% yoy and 7% qoq driven by portfolio buyouts of home loans of Rs30bn, wholesale loans declined due to run down in the overseas book that declined 58% yoy and 14% qoq.
• NIMs improved 5bps qoq to 2.23% due to run down of lower yielding foreign loans. However due to weak loan growth, growth in NII was subdued declining 2% yoy.
• Slippage of Rs30bn was higher than Rs27 qoq but lower than the run-rate of the last two years. With recovery and sale to ARCs, GNPAs declined 1% qoq. Slippage in the MSME segment continued to increase on a high base and grew 24% qoq. Mgmt expects MSME slippage to remain high in the next few quarters.
• Non-interest income ex trading grew 14% yoy. With higher trading gains, total non-interest income grew 25% yoy and 22% qoq.
• Credit cost rose sharply to 2.9% in 3Q after declining to 2.3% in 2Q led by ageing provisions.
• CET1 remains low at 7.5% against 8% required by March 2019. The bank believes the government will infuse the required capital to fund 10% loan growth and to meet BASEL norms.
• Mgmt expects slippage to decline to Rs20-22bn in 4Q from Rs29bn in 3Q. If IL&FS Tamil Nadu Power of Rs9bn turns non-performing, slippage would be higher. NCLT recoveries in 4Q would be Rs40bn against total reduction to NPLs of Rs34bn in 3Q. 3 power accounts under Samadhan are expected to be resolved in 4q of which Union has exposure to two – Prayagraj and GMR Chattisgarh. KSK Mahanadi also has a buyer so could be resolved soon.

Valuation and view

With loss at the pre-tax level, consistently weak earnings and low CET1, the outlook remains weak. 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. We maintain Neutral despite cheap valuations.