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No let-up in worries over asset quality

FY18e earnings cut sharply to factor in pressure on NIMs and higher credit costs.

Balance sheet recalibration is evident from stronger focus on RAM portfolio.

Union Bank of India reported a loss of Rs 12.5 bn. PPoP growth of -15%/-11% q-o-q/y-o-y was nullified by elevated provisions of Rs 32.5 bn (8% q-o-q decline) as the bank provided Rs 9.9 bn towards the NCLT 2nd list in advance, thereby taking care of all provisioning needed towards these accounts by FY18. Provisions also included Rs 481 m of additional provisions towards standard accounts in telecom and power sector.

NII growth up on moderate base to 19% y-o-y (Rs 25.5 bn), even with an interest reversal of Rs 3.8 bn. Domestic/global NIM was at 2.34/2.12%. Muted trading gains led to 35% y-o-y decline in other income.

Gross slippages spiked 56% q-o-q to Rs 41.9 bn (5.8% slippage ratio) vs Rs 26.9 bn in last quarter, while recoveries and upgrades picked up to Rs 6.9 bn, leading to net slippage ratio of 5.3%. Total pool of NSL (NNPL + OSRL + other stressed loans) fell to Rs 301.4 bn (10.3% of advances) from 11.5% in the previous quarter.

Valuation and view: Balance sheet recalibration is evident from stronger focus on RAM portfolio. However, ageing of the NPL portfolio and continued elevated slippages and credit costs will pressurise earnings. Resultantly, we expect RoA/RoE to remain sub-optimal at 0.3/6% for FY19. We cut earnings sharply for FY18e to factor in pressure on NIMs and higher credit costs and build in Rs 45.2 bn of capital infusion in Q4FY18 (recap bonds) and another Rs 40 bn of capital raise in FY19. Maintain Neutral with a target price of Rs 145 (0.6x Mar 20 BV) in view of prolonged pressure on profitability.

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