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Buy These 2 Banking Stocks For A 46% Upside, Says Motilal Oswal

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Brokerage firm, Motilal Oswal is betting on the stock of Union Bank, which it believes has the potential to generate solid returns for investors from the current levels. It is also betting on NBFC stock of Shriram City Union for gains.

 

Rationale to buy the stock of Union Bank

Rationale to buy the stock of Union Bank

The Brokerage has a "buy" on the stock of Union Bankwith a price target of Rs 55, which is higher by almost 46% from the current levels of Rs 37. According to the brokerage firm Union Bank reported healthy operating performance, supported by higher other income and improving margin trajectory, despite sluggish business growth. Domestic net interest margins expanded by 71 basis points QoQ to 3.11%.

Select valuation parameters for Union Bank from Motilal Oswal (estimates)

FY 2021-22 FY 2022-23
EPS Rs 7.9 Rs 11.8
Price to earnings 4.81 3.2
Price to book value 0.4 0.3
Price to a/bv 0.5 0.5
Union Bank: Operating performance showing signs of recovery
 

Union Bank: Operating performance showing signs of recovery

Union Bank reported a net profit of Rs 11.8 billion (+255% YoY), supported by higher treasury gains of Rs 11.1 billion and recovery from written of account of Rs 3.3 billion, even as total provisions stood elevated Rs 35 billion.

According to broking firm, Motilal Oswal slippages stood elevated (4.8% annualized), led by higher slippages in the MSME and two large corporate accounts slipping in 1QFY22.

"However, higher write-offs and up gradations aided stable asset quality on a sequential basis. SMA-2 overdue stood at 3.7% of loans, and restructured book stood at 2.7% of net loans. We conservatively estimate RoA/RoE of 0.6%/11.4% by FY23E. We resume coverage with a Buy rating," the brokerage has said.

Buy the stock of Shriram City Union Finance

Buy the stock of Shriram City Union Finance

The brokerage also has a buy on the stock of Shriram City Union Finance, post the company's quarterly numbers. According to the brokerage there has been no major deterioration in asset quality and the restructuring too has been minimal. The firm has noted that the Capital adequacy remained strong with Tier I at 30% (up 90bp QoQ).

Valuations matrix from Motilal Oswal for Shriram City Union, estimates

FY 21-22 FY 22-23
P/E 9.7 8.00
Price to book value 1.3 1.1
Dividend yield 1.4% 1.4%
Shriram City Union: Loan book muted

Shriram City Union: Loan book muted

"Loan book growth has remained muted, given the impact on disbursements (from lockdowns). However, liability-side and liquidity issues faced by the company immediately after the outbreak of the pandemic have now receded into the sidelines," Motilal Oswal has said.

While cost of funds (calculated) declined 21 basis points sequentially to 8.9%, calculated yields (on AUM) stood at 19.7% (up 20 basis points QoQ). Spreads improved by 40 basis points QoQ to 10.8%.

"Despite a presence in vulnerable product segments like MSME, 2W, and Personal loans, asset quality performance has been encouraging, with minimal restructuring. With an equity infusion of Rs 2 billion from the parent, Shriram Housing will be looking forward to strong growth and carving out its niche in the Affordable Housing Finance segment," the brokerage has said.

Disclaimer

Disclaimer

Investing in stocks poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage houses are not liable for any losses caused as a result of decisions based on the article. Investors should take care because the markets are near record highs.

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