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.