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MOSL: UNION BANK OF INDIA (Buy)-Stable quarter; asset quality improvement continues

UNION BANK OF INDIA: Stable quarter; asset quality improvement continues

(UNBK IN, Mkt Cap USD4.5b, CMP INR49, TP INR65, 31% Upside, Buy)

 

• Union Bank of India (UNBK) reported healthy earnings, supported by recovery from the DHFL resolution. Furthermore, fee income trends improved, while domestic margins declined; muted loan growth affected NII growth.
• On the other hand, asset quality performance was stable despite elevated slippage, largely led by Corporate – this includes slippage from SREI Infra (INR26b). However, higher write-offs and upgrades aided improvement in asset quality on a sequential basis. Moreover, it now carries provisions of 65% on SREI Infra (higher v/s peers). The SMA-2 book declined to 2.3% of loans (v/s 3.7% of loans in 1QFY22). Thus, slippage would moderate from FY23 onwards, and credit costs are expected to come in at 2.2%/1.9% for FY22/FY23. Thus, we estimate RoA/RoE of 0.8%/14.2% by FY24E and maintain a Buy rating.

 DHFL resolution supports earnings; asset quality improvement continues

• UNBK reported PAT of INR15.3b (+195% YoY), supported by higher recoveries from written-off accounts of INR17.6b, including recovery of INR16.5b from the resolution of the DHFL account. 1HFY22 NII/PPoP/PAT grew 9%/19%/219% YoY.
• NII grew ~9% YoY (3% QoQ decline) to INR68.3b, with domestic margins down 13bp QoQ to 2.98%.
• Core fee income grew 26% YoY, while treasury gains declined 22.5% YoY to INR8.0b. However, higher recoveries from written-off accounts supported other income (65% YoY).
• Opex grew ~22% YoY to ~INR47b. Therefore, the C/I ratio improved ~330bp QoQ to 43.8%. PPoP also grew 26% YoY to INR60.7b.