Accumulate Union Bank; target Rs 155: P Lilladher

Prabhudas Lilladher's report on Union Bank of India (UBI)

"Union's margins contracted ~25bps QoQ as asset yields contracted by ~20bps, whereas liability cost remained sticky v/s Q4. Interest reversals did have some impact on margins and could reverse if asset quality inches up but base rate cut by Union in early Jul-13 is likely to pressure NIMs further. The sharp NIM contraction (~40bps YoY) has been a big drag on core PPOP (~3 percent YoY contraction) despite the aggressive growth (14 percent YoY). The other pressure point on PPOP has been inch up in opex (15 percent YoY) and is likely to continue given pension shortfalls though we have been highlighting that Union seems relatively better placed." "Gross slippages inched up finally to Rs15bn from Rs7-8bn slippages reported in the last 3-4 quarters with two fresh NPAs (Gems, IT) and Rs7bn of slippages from restructured book. Though one lumpy Q1FY14 NPA could get restructured, management acknowledged the weak macro and its potential impact on asset quality. Restructuring at Rs10bn and stock of 6.7 percent was lower than expected/peers but ~Rs50bn pipeline (including Rs23bn SEB exposure) will bridge most of the gap with peers." "Factoring in lower NIMs, we cut our estimates by 12-13 percent and expect ROAs of 65-70bps now with ROEs of 12.5- 13.5 percent. This seems to be discounted in the price at <O.5x Sep-14 book but dilution risks at current valuations is very high (1 percent Tier-1 issue is 10 percent book dilutive) and thus, we base on multiple of 0.65x on diluted book, implying a PT of Rs155/share. Sub-optimal ROEs, high dilution risks and no near-term catalysts drive our cautious view. Accumulate the stock with a target price of Rs 155," says Prabhudas Lilladher research report. Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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