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HDFC Securities Retail Research
Union Bank of India has reported healthy YoY performance in Q1 FY24, supported by strong traction in loan book and improvement in asset quality.
The management has guided for 10-12% growth in loan book for FY24. Further, gross non-performing asset and net non-performing asset are expected to be less than 6% and 1% respectively.
We have envisaged 10% compound annual growth rate in net interest income and 22% CAGR in net profit over FY23-25E while loan book is expected to grow by 11% CAGR over same time frame.
Return on average asset is estimated to improve to 0.85% by the end of FY25E. It is still trading at inexpensive valuation of 0.8xFY25E price/adjusted book value.
We are not separately ascribing any value to the subsidiaries/associates of Union Bank of India while valuing the stock.
Key triggers:
An Established player,
Improved loan book quality,
Stable liability profile,
Digitisation journey has started.
Risks and concerns
Any unfavorable change in rules and regulatory policies can have a negative impact on earnings outlook of the bank.
Lower than expected business growth or sharp rise in slippages due to economic slowdown could result in deterioration in capital. Progress on recoveries will be important point to watch out in coming quarters.
A sharp rise in interest rate could also result in mark-to-market losses on its investment portfolio.
Any further delay in the resolution of large assets due to current uncertainties and extension granted under IBC can postpone recoveries.
The bank has current account and savings account ratio at 34.6%, which is lower than industry average. This deteriorated further in Q1 FY24 quarter, with 160 basis points dip YoY basis and 102 bps dips on QoQ basis. This has had an impact on its cost of deposits as well which has increased by 94/16 bps YoY/QoQ. However, the management has changed focus towards building CASA and expects the ratio to improve going ahead. We shall closely watch the movement in the CASA ratio of the bank going forward.
The Government is holding 83.5% stake in the bank. This has to be brought down to 75% (SEBI's minimum public shareholding). The board has approved a capital raising plan of Rs 10,100 crores, which consists of Rs 5,000 crores worth of qualified institutional placement. This may pressurise the stock prices for some time.
Though the management sounded confident that transitioning to the expected credit loss provisioning regime will not be a problem considering their improved underwriting standards and aggressive provisioning in the past, we will remain watchful regarding new regulatory developments in this aspect.
Company background:
Union Bank of India, established in 1919, is one of the oldest and largest public sector banks in India. Post amalgamation with Andhra Bank and Corporation Bank with itself effective from April 1, 2020, the bank has emerged as the fifth largest in terms of total business and fourth largest in terms of network among the PSBs.
Government of India is the majority shareholder holding 83.49% stake as on June 30, 2023. As of Q1 FY24, the bank has 8,561 branches and 10,195 ATMs.
The bank has three overseas branches at Hong Kong, Dubai International Financial Centre (UAE) and Sydney (Australia); one banking subsidiary at London (UK); four para banking subsidiaries (domestic); two other joint ventures (including in life insurance business) and one associate -Chaitanya Godavari Gramin Bank.
Union Bank of India's principal banking and financial products and services include fund-based and non-fund-based facilities for corporate/ wholesale, retail, agriculture and micro, small and medium enterprises customers.
UBI also provides asset management services through its subsidiary, Union Asset Management Company Pvt. Ltd., broking services via UBI Services Ltd. and life insurance products through joints ventures i.e. Star Union Dai-ichi Life Insurance Company Ltd. and India First Life Insurance.
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