Emkay Global Financial Services' report on Union Bank of India (UBI)
"UNBK’s NII came in at Rs20.8bn (3% below estimates), however helped by strong fee income growth of 21% yoy (32% qoq) PPP was in line with estimate at Rs13.3bn
Fresh impairment increased to Rs27bn (4.5% of loans – annualized) v/s Rs17bn in Q1FY15. This also translated into higher credit cost of 1% and impacted bottom-line (Rs3.7bn – 30% below estimate). Pipeline for restructuring is at Rs17bn
Loan growth remained moderate at ~10% yoy - which is positive, yet capital position remains a worry with Tier I of 7.3% (CET 1 at 7%). Adjusted for NNPA/Net worth of 33%, CET-1 would be at 4.7%
We expect return ratio to remain low with RoAs of 0.5-0.6% and RoEs of 10-13% over FY14/17E (have not factored any capital infusion in our estimates)
At current valuations stock trades at 1.1x FY16 ABV, which seems to factor faster improvement in return ratios and better asset quality cycle – which if delayed could impact valuations. Low Tier I also remains a risk. Retain reduce", says Emkay Global Financial Services research.
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