UNION BANK OF India (UNBK), yet again, reported a Q4FY19 loss of ~Rs 34bn (leading to full-year loss of >Rs 29bn, eroding book value by Rs 17/share) due to persistent asset quality issues. Slippages rose—to ~`33bn (4.5%). This along with rising coverage (7ppt QoQ, including RBI divergence impact on provisions of >`22bn) fed into much higher credit cost. However, higher write-offs reduced GNPLs. From a business perspective, momentum remains soft, reflected in, a weak loan growth (sub-3% YoY), muted core fee (down >20% YoY), and continued weakness in CASA (up <8% YoY). This along with higher cost (up 16% QoQ, on wage revision) kept up the pressure on core operating profit (ex-treasury), down >10% YoY. Factoring in a weaker core and elevated credit costs, we are pruning FY19/20E EPS by >6% each; accordingly, ABV reduces by 18%/20% and, consequently, TP to `85 (from `90). We believe dilution risks (CET1 at 8%) and the merger overhang would persist for PSU banks. Hence, we maintain ‘HOLD’.
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Slippages rose yet again to `33bn (4.5%) largely driven by the corporate (power sector with recognition of IL&FS of `8.8bn) and agri segments. Management believes slippages have peaked out and, thus, expects them to dip as a large proportion of ‘pain’ in stressed industries has been already recognised; and book rated ‘A and above’ now forms 67% (58% in FY17). However, unrecognised stress in the power segment (<30% recognised, lower than peers), emerging concerns on SME book, and other stressed book (5:25/restructured/SRs) of 1.2% keeps us on guard.
Amid soft business momentum, the only silver lining is sustained growth momentum in the retail segment (up >15% YoY) and some improvement in NIM (though still below peers). We believe operational challenges will persistently plague midsized PSU banks. Hence, we expect UNBK’s operating profitability to remain under pressure.
While asset quality stress largely seems to have peaked out, midsized PSBs are constrained on the operational front. We believe dilution risk at weaker multiples would affect shareholder returns. Moreover, credit cost may remain volatile, though GNPLs will decline. The stock is trading fair at 0.8x FY21E P/ABV. We maintain ‘HOLD/SU’.