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MOSL: UNION BANK OF INDIA: NII growth healthy; other income boosts earnings further (UNBK IN, Mkt Cap USD3.2b, CMP INR37, TP INR50, 35% Upside, Buy)

• Union Bank of India (UNBK) reported a strong 32% YoY growth in PAT at INR15.6b (25% beat) driven by higher NII and other income while provisions and opex came in higher than our estimates.
• Fresh slippages saw a sequential moderation, which coupled with high write-offs and healthy recoveries and upgrades resulted in an improvement in asset quality ratios. Restructuring book remained at 2.92% of loans.
• We raise our PAT estimates by 9% and 3% for FY23E and FY24E on higher other income and estimate RoA/RoE at 0.7%/12.3% by FY24E, respectively. Maintain BUY with a TP of INR50 (premised on 0.6x FY24E ABV).

Margins expand 25bp QoQ to 3%; PCR stable at ~70%

• UNBK reported 32% YoY growth in 1QFY23 PAT at INR15.6b (25% beat) driven by higher NII and other income, even though provisions and expenses came in higher than our estimates.
• NII grew 12% QoQ (+8% YoY) to INR75.8b, stronger than the loan growth of 2.3% QoQ. NIMs, thus, expanded 25bp QoQ to 3%.
• Other income was flat YoY (significant beat) led by higher recoveries from written-off accounts. Fee income remained strong while the bank reported treasury gains of INR1.7b v/s INR9.9b in 1QFY22.
• Operating expenses grew 10% QoQ (+7% YoY) to INR49.5b. The C/I ratio thus increased 275bp QoQ to 47.6%. Therefore, PPoP grew by modest 5% YoY to INR54.5b (14% beat). Core PPoP improved 26% YoY.
• Total loans grew 2.3% QoQ (+16% YoY) to INR6.8t. This was driven by healthy growth across all segments while overseas loans rose 9% QoQ. The management’s focus remains on growing the RAM segment. Deposit grew 9% YoY but declined 4% QoQ. CASA ratio moderated 35bp QoQ to 36.2%.
• Fresh slippages moderated to INR42.4b (2.6% annualized), which coupled with higher write-offs and healthy recoveries/upgrades resulted in an improvement in asset quality ratios. GNPA/NNPA ratio contracted 89bp/ 37bp QoQ to 10.2%/3.3%, respectively, while PCR was stable at ~70%.
• The total SMA book (>INR50m) was at 0.53% of loans v/s 4.2% in 1QFY22. The total restructured loans dipped marginally and stood at 2.92% of loans.

 

Highlights from the management commentary

• Credit growth of 12-13% expected in FY23 with share of RAM stable at 56%.
• Close to 90% of the loan book was floating in nature with the share of EBLR at 33% and MCLR at 52%.
• The management expects to report recovery of INR150b and slippages of INR130b in FY23.