We maintain a ‘buy’ rating on Union Bank with a target price of Rs 290 per share as as current valuations of 0.7x Mar-17 diluted book (adjusted book value per share Rs 318) look reasonable. With higher LLPs, we cut our FY15/16f earnings by ~3-5% but reaffirm ‘buy’. We are factoring an improvement in NIMs and asset quality, as macros are likely to improve and capital conservation reduces the need to dilute below book.
Union Bank’s Q3 PAT at Rs 300 crore largely missed our expectation due to weak asset quality and a higher tax rate. Admittedly, slippages of Rs 1,740 crore were higher than expected, especially after the sanguine asset quality guidance. We think this could lead to some near-term under-performance.
However, we remain positive as the bank continues to conserve capital with RWA growth of just 2% y-o-y; in-line PPOP performance and undemanding valuations at 0.7x March-2017 book.
The bank disappointed on asset quality, with impairments increasing to Rs 29 billion versus Rs 27 billion in Q2FY15 resulting in higher credit costs of 140 bps. Slippages at Rs 17.4 billion were significantly higher than expected and included Rs 5 billion of slippages from three lumpy accounts (sugar and construction). Our rating is partly driven by a mean reversion in asset quality which has not materialised, but improving macros will likely aid asset quality given lower incremental risk underwriting.
Union Bank reported in-line PPOP with lower forex income offset by lower opex and high treasury income.