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Research
Buy Union Bank of India - Target Price Rs. 280 - Dolat Capital
Posted On : 2013-04-02 21:39:33( TIMEZONE : IST )
- We prefer Union Bank amongst mid-cap PSBs given that it has been among the few banks which saw reduction in the pace of fresh NPL formations at a time when other PSBs are witnessing high fresh NPLs QoQ. We expect this trend to sustain over the next couple of quarters as well. Annualized delinquency ratio of 2.3% is one of the lowest amongst the PSBs and should remain one of the best in our view.
- NPL recoveries and upgradations which saw an increase in 3QFY13 is expected to improve further. Union Bank is among the few banks where NPL recoveries as % of previous two year's slippages are trending upwards. The bank recently introduced a one-time settlement scheme for MSME borrowers which has seen encouraging response and should boost the bank's NPL recoveries over the next couple of quarters.
- High fresh NPL formations and lower CASA ratio contributed to the pressure on NIM over the past 8 quarters. The reduction in the proportion of high cost bulk deposits should help support the bank's NIM in the near term. The proportion of CDs has been reduced to 2.5% of total deposits and high cost bulk deposits to 7.5% of total deposits. Going forward, we expect NIM to remain stable in FY14E and improve in FY15E onwards as deposit rates start to soften.
- The bank is increasing its focus on the retail and SME segment for loan growth. The bank expects SME segment to grow at around 30% YoY as against the overall loan growth of 17%. Increased traction in the Union Loan points which contribute to 50% of the overall retail loan growth should continue to drive the retail growth going forward.
- We expect Union Bank's net profit to grow at CAGR of 32% over the next two years as credit cost moderate over the next two years. We expect a 30bps decline in credit cost over the next two years.
- Current valuations of 0.8x on FY14E BVPS forecast not too demanding. We have a Buy rating on the stock with target price of Rs. 280 based on PBR of 1x on our FY14E BVPS forecasts. Slower pace of NPL recoveries and upgrades is a key risk to our call.
