Union Bank of India Weak PPOP more than offsets steady asset quality :: Prabhudas Lilladher

Union Bank reported robust asset quality trends with low incremental slippages
and restructuring. However, operational performance was very weak despite high
B/S growth reported. We expect ROAs of just 0.8% in FY14 despite assuming 25bps
lower credit costs due to the operational weakness and this will likely cap multiples
<1x .="" an="" asset="" but="" our="" p="" pt="" quality="" rating="" seems="" steady="" to="" underpins="" upside="">limited (Rs265/share, 0.9x Sep‐14 book).

�� -->! Operationally weak quarter: Operating metrics for Union Bank continued to
weaken, with core PPOP contracting 2% YoY. Key Metrics: (1) Loan growth at
17% YoY was better than most peers but high growth in weak environment will
have credit implications (2) NIMs dropped ~10bps QoQ and we expect some
more pressure in a falling rate cycle (3) Core fee income, which was holding up
relatively better, also seen weakening despite robust B/S growth. Like most PSU
banks, we expect FY14 to be operationally challenging with just ~9% PPOP
growth.
! Asset quality momentum fine: Gross slippages <2 and="" encouraging="" p="" remains="">with ~1% of recoveries/upgrades, net slippage of 1% was well within guidance.
Gross NPAs inched down to ~3% and management intends to control NPA % at
<3 be="" believe="" current="" difficult="" environment.="" in="" incremental="" p="" the="" we="" which="" will="">restructuring of Rs14bn (2.7% annualized) was also lower than restructuring
done by peers.
! Low ROAs to cap upside; Capital constraints also remains: With potential NIM
challenges and slowing fee income, we expect ROA of just 80bps despite
assuming ~100bps of credit costs in FY14 and this will likely cap multiples at <1x p="">book. Also at 8.2% Tier-1, capital constraints remain and increase the risk of
book dilutions. We retain a ‘BUY’ as asset quality remains stable but our PT of
Rs265/share (0.9x Sep-14 book) implies just 10% upside from current levels.