Union Bank of India’s Q4FY16 PAT of `961 million came in lower than our expectation on elevated credit costs and higher opex. Slippages, after holding on at better-than-peer average in past 7 quarters, spiked to `61.7 billion (>9%); core operating profitability remained under pressure (down >12% y-o-y) on muted core revenue traction (down >5% y-o-y) and higher opex (up >7% q-o-q) are key highlights. As we have already factored in higher credit costs in our holistic model, our earnings estimates remain broadly intact.
However, we see dilution risks and structural challenges to persist for mid-size PSU banks. Maintain ‘hold’ with TP of `125.
Slippages spiked to `61.7 billion (crossing 9.5% mark versus run-rate of 3.3% over 6 quarters), taking GNPLs to 8.7% (versus 7.05% in Q3FY16). Large part of stress emanated from iron & steel (> 45% of slippages) and infra segments. The bank expects slippages to have peaked out and anticipates a lower (albeit elevated) trend going ahead, as large part of stress in stressed industries is already recognised (>40% in iron & steel is NPL). However, the quantum of SMA -II accounts (`169 billion, >6% of book) and higher exposure to stressed segments (I&S and power), keeps us guarded. Soft NII growth (down 2% y-o-y on muted loan growth and softer NIMs) and subdued core fee led to revenue drag.