Union Bank of India - 1QFY17 Result Update - Better show on operating front, asset quality remains weak - Reliance Securities

Union Bank of India (UBI) has reported improved performance with its operating profit rising by 9.2% yoy & 15.3% qoq to Rs16.3bn in 1QFY17, which is ahead of our expectation. The Bank reported Rs1.7bn net profit (+73% qoq and -67.9% yoy) primarily due to healthy growth in operating profit, 13.5% sequential decline in provisioning expenses to Rs13.5bn along with write-back of differed tax assets worth Rs2.5bn. Despite sequential moderation, fresh slippages remain elevated at Rs36bn in 1QFY17 compared to average run rate in pre-AQR quarters. Notwithstanding improvement in operating performance, as we remain cautious on assets quality front, we assign HOLD recommendation on the stock from REDUCE with an upwardly revised Target Price of Rs144.

Management Commentary

- The Bank aims achieving gross NPA ratio of 9% by FY17-end from 10.2% in 1QFY17 to be led by higher upgrades and recovery for which the Bank has deployed ~13% of its workforce currently.

- UBI made total refinancing of Rs14.2bn under 5:25 and restructured Rs13.5bn under SDR scheme in 1QFY17 with which its outstanding standard advances under 5:25 refinancing stood at Rs36bn and Rs22.6bn under SDR scheme.

- Loan book growth remained muted (+3.5% yoy & -3.9% qoq) led by Corporate Loan Book. The Bank targets a loan book growth of 9-10% in FY17E.

- Proposed capital infusion of Rs7.2bn by the Government of India (GoI) will help the Bank to support growth in current difficult period.

Outlook and Valuation

We expect asset quality stress would continue to persist along with elevated credit costs for next 5-6 quarters, which would keep UBI's RoAs depressed at ~0.3-0.4% and RoEs at ~6-7% over FY17-18E. UBI's total outstanding stressed loan stood at ~15% of the loan book. Further, its provisioning converge ratio - excluding technical written off loans - stood at 42%, which is way below the comfort level, which would continue drag the Bank's profitability owing to higher credit cost, in our view. Notwithstanding improvement in operating performance, as we remain cautious on assets quality front, we assign HOLD recommendation on the stock from REDUCE with an upwardly revised Target Price of Rs144, valuing the stock at 0.7x FY18E Adj. Book Value.

Shares of UNION BANK OF INDIA was last trading in BSE at Rs.129.25 as compared to the previous close of Rs. 123.8. The total number of shares traded during the day was 1199529 in over 7226 trades.

The stock hit an intraday high of Rs. 131.1 and intraday low of 122.75. The net turnover during the day was Rs. 153666040.

Source : Equity Bulls

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