Union Bank of India - Await for better price point :: HDFC Securities

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Await for better price point
Key highlights from our interaction with Union
Bank of India’s (UNBK) management are as follows:
(1) Asset quality expected to improve : Slippages in 3Q
are likely to be lower (2Q: Rs 20bn; ann. 3.3% of loans)
and in-line with the earlier trend of Rs 12-13bn. Overall
reductions are expected to be better on the back of a
likely upgrade in one large AC of ~Rs 3bn (slipped in 2Q),
relief from the AP Agri book and a high one time
settlement of small ticket size loans. Post the RBI’s
refinancing guidelines; management indicated that four
large corporates have come up for discussion.
(2) Business outlook : Moderate business growth to
continue with deposit & loan growth of ~9-10% & 11-12%
for FY15 respectively . The bank maintains its aggressive
exit NIM guidance of 2.80% by 4QFY15 vs. 2.53% in
2QFY15. It expects better treasury gains (Rs 750mn in 2Q)
and MTM reversals (hit of Rs 800mn in 2Q). However,
UNBK is unlikely to use windfall gains to increase PCR.
(3) Other key-takeaways : Wage hike assumption stood
at 12%, which we believe might fall short as our
discussion with other bankers indicates that wage
settlement will be ~13.5%. UNBK is relatively better
placed in terms of pension discount rate assumptions
which stand at 8.5% vs. 8.75-9.1% for other mid-tier
PSBs such as BOI, CBK.
View and Valuation
 We believe RBI’s recent refinancing guidelines will
have a multipronged benefit to the banking sector
(esp. PSBs). The refinancing guidelines would not only
reduce the large incremental impairments but also put
to rest apprehensions about rising slippages from
restructured pool. We build in a slippage ratio of avg.
1.9% FY15-17E vs. 2.5% in FY14.
 With relatively lower Tier-I of 7.3% (one of the
concerns) we estimate capital requirement of Rs
137bn (~95% of MCap) over F16-19E. We believe the
bank’s current balanced growth approach (FYTD B/S
grew 2%); a pick-up in macros and deleveraging
exercise by corporates could lower the RWA/Asset.
Thus dilution risk could be lower than expectations.
 UNBK has significantly underperformed (~10%) vs. the
Banking indices post 2Q results. The
underperformance was largely due to (1) more than
expected higher stress addition and (2) shortfall on
NIM guidance. The recent underperformance has
made current valuations compelling at 0.84x FY17E
ABV for a RoA that could scale up to 0.7% FY17E
(+20bps over 15E). However, we maintain NEUTRAL
rating on the stock and wait for a better entry point.
Revise TP to Rs 244/sh (0.9xFY17E ABV) as we
rollover to FY17E ABV.

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3010448