Union Bank of India reported profits ahead of both our and street estimates driven by higher treasury and core fee income. Treasury income grew by 123% y-o-y and 14% q-o-q to R430 crore led by higher profit from bond portfolio. This helped the bank to report 60.9% y-o-y and 4.7% q-o-q growth in pre-tax profit. However, Pat declined by 23.4% y-o-y to R440 crore due to tax write-back of R180 crore in Q4FY14 versus tax pay out of R200 crore in Q4FY15. Asset quality has also witnessed improvement as fresh slippages ratio improved to 2.5% in Q4FY15 versus 2.9% in Q3FY15 and 3.4% in Q2FY15. We recommend buy on the stock.
Amidst the challenging interest rates and macroeconomic regime, Union Bank of India has been delivering reasonable operating and asset quality performance. The management has guided that fresh NPAs is expected to further moderate in FY16e. However, we expect negative surprise on asset quality front in next two quarters, due to relatively slower pace in economic recovery. Management has also guided that H1FY16e will remain challenging on asset quality front. As a result, we have assigned lower price to book multiple of 0.7x FY17e adjusted book value (earlier 0.9x FY17e ABV) and arrive at revised target price of R204 from R264 earlier.
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