EUR 120.00 For Business Accounts Only

MOSL : UNION BANK OF INDIA: Earnings beat driven by a healthy operating performance

UNION BANK OF INDIA: Earnings beat driven by a healthy operating performance

(UNBK IN, Mkt Cap USD3.9b, CMP INR47, TP INR65, 38% Upside, Buy)

Asset quality improves sharply

• UNBK reported a 21% YoY growth in PAT at INR18.5b in 2QFY23 (10% beat), driven by higher NII and other income and tax reversals. However, the same was offset by higher than expected provisions.
• However, fresh slippages moderated by 31% QoQ, led by lower Corporate and Retail slippages. This, coupled with higher write-offs and healthy recoveries and upgrades, resulted in an improvement in asset quality ratios. The restructured book declined to 2.6% of loans v/s 2.92% in 1QFY23. The SMA book, at 57bp, is also fairly controlled.
• The bank also witnessed strong traction in loans, up 7.6% QoQ and 18% YoY. Growth is fairly balanced, with a contribution from all segments.
• We revise our FY23 PAT estimate by 14%, led by higher NII and other income and lower tax. Our FY24 earnings estimate is largely flat. We estimate a RoA/RoE of 0.8%/13.9% by FY24. We maintain our Buy rating.

 

Margin expands by 15bp QoQ to 3.15%; PCR inches up marginally to 71%

• UNBK reported a 21% YoY growth in PAT at INR18.5b in 2QFY23 (10% beat) driven by higher NII and other income. While provisions remain elevated, the impact was partially offset by tax reversals. In 1HFY23, UNBK reported a 26% YoY growth in PAT at INR34b.
• NII grew 10% QoQ and 22% YoY to INR83.1b in 2QFY23, led by a combination of robust loan growth of 7.6% QoQ and a 15bp expansion in NIM to 3.15%. In 1HFY23, NII grew 15% YoY to INR158.9b.
• Other income fell 18% YoY, but grew 16% QoQ, led by higher recoveries from written-off accounts and treasury income. This was 15% higher than our estimates.
• Operating expenses grew 6% YoY to INR50b. The C/I ratio moderated by 60bp YoY to 43.2% in 2QFY23. PPOP/core PPOP grew 8%/19% YoY to INR65.8b/INR62.8b. In 1HFY23, PPOP grew 7% YoY to INR120b.
• The bank saw an impressive loan growth of 7.6% QoQ and 25% YoY to INR7.3t, led by robust traction across all segments. Corporate/Overseas loans grew 8%/13% QoQ. The RAM segment grew 5.4% QoQ. The management aims to further scale this segment, with a share of 55% in the business mix. Deposits grew 5.1% QoQ and 14% YoY. CASA ratio moderated 56bp QoQ to 35.6%.
• Fresh slippages significantly moderated to INR29.1b (1.7% annualized). This, coupled with higher write-offs and healthy recoveries and upgrades, led to an improvement in asset quality ratios. The GNPA/NNPA ratio fell 177bp/ 67bp QoQ to 8.45%/2.64%, while PCR rose marginally to 71%.
• The total SMA book (over INR50m) stood at 0.57% of loans v/s 1.5% in 2QFY22. The total restructured loans declined marginally to 2.6% of loans.

Highlights from the management commentary

• While UNBK is performing in sync with the management’s guidance for FY23, it has not changed the same, given the volatile external environment.
• Corporate growth remains strong, with demand from Infra, NBFC, Chemicals, Steel, Power, Textile, and Cement segments.
• The management is confident of achieving a recovery of INR150b in FY23.