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Union Bank Of India (UNBK.BO)
Upgrade to Buy on Attractive Valuation
Upgrade to Buy, Target Price Rs275 — We are upgrading Union Bank to a Buy
(from a Sell earlier) as the stock has corrected sharply (down 28% in the last 6
months) and current valuations appear attractive (trades at 0.8x 1yr Fwd P/BV).
Our revised target price of Rs275 is based on our EVA methodology and
benchmarked to 1.0x 1Yr Fwd P/BV (1.2x earlier).
Lower Exposure to Sensitive Sectors a Positive — We believe that under the
current tough macro environment, asset quality concerns are at the forefront and
given that Union Bank has one of the lowest exposures to sensitive sectors; it
should be placed on relatively firmer ground versus peers. Union’s exposures to
power (8% of loans) and SEBs (0.7%) are lower than peers. Alongside, its net
interest margins remain strong and loan growth healthy.
Quant View: Contrarian — As per our quantitative methodology, Union Bank
currently lies in the Contrarian quadrant of our Value-Momentum map with
relatively weak momentum but better valuation scores. It has been trading at a
relative discount to many better government-sector banks.
Union Bank currently lies in the Contrarian quadrant of our Value-Momentum map
with relatively weak momentum but strong value scores. It has been a resident
there since the past 9 months. Compared to its peers in the Banks sector, Union
Bank fares better on the valuation metric but worse on the momentum metric. On
the other hand, compared to its peers in its home market of India, Union Bank fares
better on the valuation metric and on the momentum metric.
From a macro perspective, Union Bank is likely to benefit from falling commodity
(ex-oil) prices, falling EM yields, and a weaker US Dollar.
Union Bank Of India
Company description
Union Bank is the seventh largest bank in India and sixth largest government bank,
with a large balance sheet size and diversified distribution network. It currently has
3,127 branches and 2,673 ATMs spread across the country. Its business is
distributed across the country with a slight concentration in Western India. Union
Bank listed in 2002. A follow-on offer was transacted in February 2006, with the
government holding a 57% stake in the bank.
Investment strategy
We rate Union Bank Buy/Low Risk. Union has key strengths with its large balance
sheet and distribution, low operating costs (as a proportion of assets) below industry
average and a healthy return profile. Moreover, Union's exposure to sensitive
sectors such as power is lower than peers, which is a key advantage in the current
uncertain asset quality environment. The operating environment has remained
challenging in recent months, and Union has witnessed asset pressures; but we
believe economic stability (inflation, liquidity, growth) should cap further asset
quality pressure and present stock upsides.
Valuation
Our target price of Rs275 is based on our EVA model, which we believe captures
the long-term value of the business and is a standard valuation measure for our
India banking coverage. We are factoring in a risk-free rate of 8.0%, with an industry
average spread (220bps) and a longer term cost income ratio of 39%. We also
benchmark our target price on a 1.0x 1Yr Fwd PBV, which translates to a fair value
of Rs269. We believe Union should trade at a 15-25% discount to the larger banks
(such as SBI), due to: 1) its lower capital cushion which is likely to cap upside in a
higher growth environment; and 2) its relatively modest deposit mix, which
increases dependence on wholesale funding. We use EVA as a primary
methodology as we believe it better adjusts for the relatively dynamic cost of capital,
and as it is usually the more conservative target price in a difficult interest rate
environment.
Risks
We rate Union Bank Low Risk, in-line with our quantitative risk rating system, which
tracks 260-day historical share price volatility. Key downside risks to our target price
include: 1) tighter liquidity environment which could further hurt NIMs, 2) increase in
asset quality pressures, 3) continued slowdown in loan growth, and 4) moderation in
its deposit mix.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Union Bank Of India (UNBK.BO)
Upgrade to Buy on Attractive Valuation
Upgrade to Buy, Target Price Rs275 — We are upgrading Union Bank to a Buy
(from a Sell earlier) as the stock has corrected sharply (down 28% in the last 6
months) and current valuations appear attractive (trades at 0.8x 1yr Fwd P/BV).
Our revised target price of Rs275 is based on our EVA methodology and
benchmarked to 1.0x 1Yr Fwd P/BV (1.2x earlier).
Lower Exposure to Sensitive Sectors a Positive — We believe that under the
current tough macro environment, asset quality concerns are at the forefront and
given that Union Bank has one of the lowest exposures to sensitive sectors; it
should be placed on relatively firmer ground versus peers. Union’s exposures to
power (8% of loans) and SEBs (0.7%) are lower than peers. Alongside, its net
interest margins remain strong and loan growth healthy.
Quant View: Contrarian — As per our quantitative methodology, Union Bank
currently lies in the Contrarian quadrant of our Value-Momentum map with
relatively weak momentum but better valuation scores. It has been trading at a
relative discount to many better government-sector banks.
Union Bank currently lies in the Contrarian quadrant of our Value-Momentum map
with relatively weak momentum but strong value scores. It has been a resident
there since the past 9 months. Compared to its peers in the Banks sector, Union
Bank fares better on the valuation metric but worse on the momentum metric. On
the other hand, compared to its peers in its home market of India, Union Bank fares
better on the valuation metric and on the momentum metric.
From a macro perspective, Union Bank is likely to benefit from falling commodity
(ex-oil) prices, falling EM yields, and a weaker US Dollar.
Union Bank Of India
Company description
Union Bank is the seventh largest bank in India and sixth largest government bank,
with a large balance sheet size and diversified distribution network. It currently has
3,127 branches and 2,673 ATMs spread across the country. Its business is
distributed across the country with a slight concentration in Western India. Union
Bank listed in 2002. A follow-on offer was transacted in February 2006, with the
government holding a 57% stake in the bank.
Investment strategy
We rate Union Bank Buy/Low Risk. Union has key strengths with its large balance
sheet and distribution, low operating costs (as a proportion of assets) below industry
average and a healthy return profile. Moreover, Union's exposure to sensitive
sectors such as power is lower than peers, which is a key advantage in the current
uncertain asset quality environment. The operating environment has remained
challenging in recent months, and Union has witnessed asset pressures; but we
believe economic stability (inflation, liquidity, growth) should cap further asset
quality pressure and present stock upsides.
Valuation
Our target price of Rs275 is based on our EVA model, which we believe captures
the long-term value of the business and is a standard valuation measure for our
India banking coverage. We are factoring in a risk-free rate of 8.0%, with an industry
average spread (220bps) and a longer term cost income ratio of 39%. We also
benchmark our target price on a 1.0x 1Yr Fwd PBV, which translates to a fair value
of Rs269. We believe Union should trade at a 15-25% discount to the larger banks
(such as SBI), due to: 1) its lower capital cushion which is likely to cap upside in a
higher growth environment; and 2) its relatively modest deposit mix, which
increases dependence on wholesale funding. We use EVA as a primary
methodology as we believe it better adjusts for the relatively dynamic cost of capital,
and as it is usually the more conservative target price in a difficult interest rate
environment.
Risks
We rate Union Bank Low Risk, in-line with our quantitative risk rating system, which
tracks 260-day historical share price volatility. Key downside risks to our target price
include: 1) tighter liquidity environment which could further hurt NIMs, 2) increase in
asset quality pressures, 3) continued slowdown in loan growth, and 4) moderation in
its deposit mix.
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