Weak performance Union Bank :: HDFC Securities

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Weak performance UNBK’s results were disappointing with higher than estimated gross stressed additions (Rs 30bn, 4.8% ann.), second consecutive quarter of QoQ NIM compression to 2.5% and sixth consecutive quarter of PCR decline (57%). Net earnings were 40% below estimates led by higher LLP and a higher eff. tax rate (~50%), despite a huge treasury gain of Rs 2.5bn (41% of PBT). Marginal positives were RWA increase contained at 2% YoY vs. 9% loan growth, stable CASA ratio and improving growth trend in fee income. Its second straight quarter of weak nos. on most operating parameters has led to UNBK underperforming significantly vis-à-vis the broader market. Factoring in the sharp deterioration in asset quality and earnings of 3Q, we reduce our ABV and PAT estimates by 2/3% and 5/4% for FY16/17E respectively. Though valuations at 0.9x FY17E appears compelling, our expectation of subdued RoA profile and imminent dilution risk makes us cautious. Maintain NEUTRAL with a revised TP of Rs 235/sh (0.9x FY17E ABV).  Gross stressed additions remain elevated at Rs 30bn (ann. 4.8%). Slippages came in at Rs 17.4bn (ann. 2.8%) driven by two large a/cs (Rs 5bn). Further, with poor upgrades/recoveries of merely Rs 3.9bn, GNPA (5.1%) increased 10% QoQ. Despite rise in credit cost (+12% QoQ, ann. 1.1%) PCR declined 70bps to 57%. Hence NNPA (2.9%) jumped 10% QoQ. Restructuring was high at Rs 12.1bn, o/s std. restructured book stands at Rs 123bn (5% of loans).  NIM declined for the second consecutive quarter, down 3bps QoQ to 2.5% vs. expectation of a marginal improvement. High interest income reversal of Rs 800mn (9bps impact) due to elevated stressed additions impacted NIM, despite a QoQ decline in cost of funds. We factor NIM of 2.6% for FY15-17E.  Loan growth moderated to 9% YoY owing to continued decline in large corporate segment. Though focus segment MSME (+25%), Retail (27%) & Agri (+29%), continued to report strong growth. We like the bank’s strategy of de-risking its B/S by containing RWA growth and preserving much needed capital (Tier-I: 7.3%). However bank still faces high dilution risk in near to medium term. With estimate a total capital requirement of Rs 128bn (85% MCap) over FY16-19E.

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