1. BofAML puts ‘underperform’ rating on Union Bank of India

BofAML puts ‘underperform’ rating on Union Bank of India

Union Bank of India (UBI) reported 2Q net profit of R1.7 billion, down 73% y-o-y and 30% miss, mainly due to higher provisions, which were partly countered by bumper trading gains.

By: | Published: November 8, 2016 6:18 AM

Union Bank of India (UBI) reported 2Q net profit of R1.7 billion, down 73% y-o-y and 30% miss, mainly due to higher provisions, which were partly countered by bumper trading gains. Slippages remained elevated at R34 billion (<5% q-o-q decline). Nearly 90% of slippages were from corporate side of the book. About R12 billion of new NPLs came from restructured book, residual of which remains is 2% of loans. During 2Q17, loans refinanced under the 5/25 scheme were from power (R3.3 billion) and total stock was R40 billion. UBI carried out strategic debt restructuring of R26 billion (dominated by telecom and power) and now has a stock of R47 billion.

Loans grew 8% y-o-y, driven by retail, farm and small enterprises growing at 18% y-o-y. Tier-1 continued to be low at 8.6%. Loan growth guidance is 10% and deposit growth at 6-7% for FY17.

We lower our FY17 profit estimates by 10% on factoring in higher credit costs persisting on identified stress by the bank. With Tier-1 weak, growth will be a challenge, in our view. UBI, while trading at 0.4x FY18E nominal BV, trades at 4.5x FY18 adjusted BV if we adjust for net NPLs. Assigning a BV multiple of 1.0x (for ROE of 13% in FY20E) and discounting back, we arrive at a new PO of R101 (from R92). Capital and asset quality remain key challenges. Hence, we reiterate our Underperform rating on UBI.

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