BofAML, CLSA see up to 50% slide in Union Bank of India post Q4 results

The logo of Union Bank of India is pictured on the wall of its branch in Kolkata, India, April 11, 2017. REUTERS/Rupak De Chowdhuri - RTX3531T

Moneycontrol News

Global brokerage firms such as BofA-ML and CLSA maintain their rating on Union Bank of India but has put out a steep cut in target price largely on account of asset quality issues.

Public sector lender Union Bank of India has registered an increase of 12.5 percent in net profit to Rs 108.22 crore during the fourth quarter ended March 2017 on higher income from investment and other sources. But, asset quality worsened.

Asset quality of the bank worsened with gross non-performing assets (NPAs) rising to 11.17 percent of gross advances at the end of March 31, 2017, against 8.70 percent year ago. Net NPAs or bad loans were at 6.57 percent of net advances at the end of last fiscal from 5.25 percent year ago.

Provisioning for bad loans and contingencies during the quarter increased to Rs 2,444.12 crore from Rs 1,564.67 crore year earlier.

BofA-ML maintains an underperform rating on Union Bank of India with a target price of Rs 79, which translates into a slide of 57 percent from current levels.

“We have cut our FY18/19 net profit estimates by 18 percent factoring in higher credit costs persisting on identified stress by the bank. Moreover, with Tier 1 weak, growth will be a challenge,” said the report.

“We reiterate 'underperform' as we think the stock is likely to de-rate to 1.1x adjusted book value in FY19 (previously 0.7x FY18E), given ROA of just ~0.4% and weak asset quality. Reiterate PO of Rs.79,” it said.

Reacting to the news, shares of Union Bank of India slipped nearly 4 percent in morning trade on Tuesday. For the full year, bank's net profit, however, was down at Rs 555.21 crore in 2016-17 as against Rs 1,351.60 crore a year ago.

CLSA maintained its sell rating on Union Bank of India with a target price of Rs 130 which translates into a slide of 30 percent from current levels.

Growth in gross NPLs was confined to 4 percent QoQ due to higher write-offs; gross NPL ratio is high at 11 percent of loans. In fact, total and net NPL/net worth is at 79 percent.

"Though we expect earnings to improve from FY18 onwards, the bank’s core profitability remains weak with ROA of 0.2 percent in FY18. We retain SELL with a target price of Rs 130 based on 1.5x Mar-19CL adjusted PB,” said the CLSA note.