Upgrade Union Bank of India to BUY - Asset Quality Pressure to ease, Rally to Continue - Karvy

After the recent rally in stock price, Union Bank of India (UBI) trades very close to its average valuation, while the stock has outperformed the Bankex by 4% over last one year. We believe it to continue to rally, as it further improves its asset quality.

Pressure on Asset Quality to Ease: After reporting a dismal Q1FY13, UBI was able to contain its slippages in Q2FY13. The Bank's Management has guided that the Bank's slippages to move towards the Q2FY13 levels, going ahead. The Bank has offered an OTS scheme pertaining to NPAs prior to FY09 for outstanding up to Rs. 1 mn in cases where it does not have adequate collateral. Meanwhile, similar scheme offered for outstanding up to Rs. 0.5 mn received healthy response in Q2FY13.

Selective Growth in Credit: While UBI's overall credit in corporate segment is slowing down, its Management expects a moderate growth in credit of ~17% in FY13 driven by Retail, Agriculture & SME segment. The Bank is focusing more in Tier-II & Tier-III cities for expanding retail credit. The Bank's delinquency experience in the SME segment with Gross NPA of 4.3% is better than its peers.

NIMs - Expected to Remain Stable: UBI's NIMs declined by 20 bps to 3% over last year. The UBI's Management expects that the Bank's NIMs to stabilize at current levels, going forward. The pressure on NIMs owing to discounts on retail segment would be offset by moderate growth in SME segment and by bringing down the proportion of high cost deposits by ~500 bps over last year.

Outlook & Valuation

At the CMP, the stock trades at 4.7x & 4.0x FY14E & FY15E earnings, and at 1.0x & 0.9x P/ABV FY14E & FY15E, respectively. Based on 10% discount to its historical mean valuation implying 1.0x P/ABV FY15E, we upgrade our recommendation on Union Bank of India to "BUY" from "HOLD" with upwardly revised target price of Rs. 315 per share (from Rs. 260 earlier).

Source : Equity Bulls

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