Maintain 'hold' on Union Bank of India - TP lowered to Rs.176 - Geojit BNP Paribas Financial Services

- Rating on Union Bank of India is maintained to 'hold' with a lowered target price of Rs.176.

- EPS estimates and TP lowered due to increase in slippages and restructured assets.

- It seems that the bank's asset quality deteriorated significantly. Annualised NPL slipped 4.5% due to some bulky corporate loans.

- It is expected that slippages to increase to 2.5% (1.7% previously) in FY13 and to 2% in FY14.

- Restructured assets are expected to increase 9-10% in FY13-14 from 7.8% currently. Consequently, EPS is cut 15% each for FY13-14 and lower TP by 25% to Rs.176.

- Asset quality across PSU banks has worsened. Union Bank is expected to perform slightly better than peers due to its focused recovery efforts under a new management, 1QFY13 results highlights the severe stress in the system and that it can be reduced only gradually on policy reforms. Hence, NPL estimates have raised for FY13-14.

- At the target price of Rs.176, Union Bank has been valued at 0.8 times of expected book value for FY13, which seems fair given the uncertainty on NPL and the extent of restructured asset creation.

- If Union Bank raises capital at depressed valuations to meet Basel 3 targets, it would be EPS dilutive.

- Bank's 1QFY13 PAT at 510 crore was below market expectations mainly due to higher provisions and lower other income.

- Profit & loss account remained vulnerable with calculated provision coverage ratio at 42.7%. Any policy reform should ease the stress for PSU banks.

Source : Equity Bulls

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