Buy Union Bank: ICICI Securities

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Broking house, ICICI Securities is bullish on Union Bank and has recommended buy rating on the stock.

 

ICICI Securities report on Union Bank:

 

We are upbeat on Union Bank of India's (UBoI) prospects after meeting its management.   Issuances of perpetual and upper tier II debts have allayed concerns on low capitalisation   and would sustain higher RoEs. We also believe that the bank would maintain its low-cost   advantage through to FY09E. Though we expect the bank to miss its 3% NIM guidance for   FY07E by 8-10bps, the dent in margins in H1FY07E (due to resource cost pressures) will   likely be recouped in H2FY07E. We marginally downgrade our FY07-08 earnings   estimates by 0.3-0.45%; raise fair value estimate to Rs172/share and introduce FY09 estimates.   

 

Low capitalisation concerns put to rest:

 

Through a mix of perpetual debt and hybrid tier II borrowings, UBoI has notched up a CAR in excess of 12% (150bps increase over H1FY07 levels) and addressed capital adequacy concerns in a non- RoE dilutive manner. We believe with significant headroom available (~8% out of the permissible 15% limit) for raising further perpetual debt under tier I, the bank is comfortably placed to sustain a 20%+ growth in risk weighted assets. Further, it is unlikely to contemplate a dilution until end-FY09E, which puts to rest any concerns about an RoE compression. 

 

Average resource profile may constrain margin expansion:

 

Unlike most other PSU banks, UBoI's resource profile with 33% CASA is below average. This intensifies the pressure to solicit costlier bulk deposits and increases susceptibility to margin pressures. However, we believe that recent initiatives towards expanding financial inclusion through stepping up rural and semi urban coverage by leveraging technology is likely to shore up resource mix in the long term. 

 

Though best-in-class operating leverage to sustain higher RoEs:

 

UBoI's operating leverage is higher than most PSU banks and this singly boosts RoE.  Operating efficiencies are unlikely to suffer in the medium term on the back of a predominantly wholesale resource strategy and savings from staff costs (~5-7% of the workforce is retiring by FY10E).

 

Well poised to sustain higher premium on valuations:

 

As the key risk on sustenance of higher RoE abates, the bank is poised to sustain healthy earnings   growth momentum and higher valuation premiums. Our fair value estimate for the   stock is at Rs172/share over the next year, implying a 62% upside from the current   levels. Valuations are reasonable at FY07E P/B of 1.2x and we expect a healthy 3.6% dividend yield in FY07E. Maintain Buy.