Mid Cap Banking Stock Reported 32% YoY Growth In 1Q, Buy For 30% Upside: Motilal Oswal

Motilal Oswal in its recent report on Union Bank Of India is bullish on the stock of the bank. The brokerage suggests buy the stock of the bank for a target price of Rs 50 per share. Bank's asset quality improves. The bank has reported a strong 32% YoY growth in PAT at Rs 15.6b driven by higher NII and other income while provisions and opex came in higher than our estimates. Fresh slippages saw a sequential moderation, which coupled with high write-offs and healthy recoveries and upgrades resulted in an improvement in asset quality ratios. Restructuring book remained at 2.92% of loans. Union Bank Of India is a mid cap bank having a market capitalization of Rs 26,313.78 crore.

Stock Outlook & Returns

The current market price (CMP) of Union Bank Of India is Rs 38.50 per share, which opened at Rs 37.90 per share. Trading 2.26% above the previous close. The Current Market Price of the stock is Rs 5.8 above the 52-week low of 32.70 per share level, recorded on August 23, 2021. The 52-week high of the stock recorded on November 09, 2021, is Rs 54.80 per share.

The stock has gained 0.79% in the past 1 week and 9.86% in the past 1 month, respectively. It has given 8.31% of positive returns in 1 year. However, in 3 and 5 years, it has given negative returns of 45.19% and 75.51%, respectively.

According to Motilal Oswal's estimated target price of Rs 50 per share and the Current Market Price, the stock sees a potential upside of 30% in 12 months

Margins expand 25bp QoQ to 3%; PCR stable at ~70%

Union Bank of India reported 32% YoY growth in 1QFY23 PAT at Rs 15.6b (25% beat) driven by higher NII and other income, even though provisions and expenses came in higher than our estimates. NII grew 12% QoQ (+8% YoY) to INR75.8b, stronger than the loan growth of 2.3% QoQ. NIMs, thus, expanded 25bp QoQ to 3%. Other income was flat YoY (significant beat) led by higher recoveries from written-off accounts. Fee income remained strong while the bank reported treasury gains of Rs 1.7b v/s Rs 9.9b in 1QFY22.

Operating expenses grew 10% QoQ (+7% YoY) to Rs 49.5b. The C/I ratio thus increased 275bp QoQ to 47.6%. Therefore, PPoP grew by modest 5% YoY to Rs 54.5b (14% beat). Core PPoP improved 26% YoY. Total loans grew 2.3% QoQ (+16% YoY) to Rs 6.8t. This was driven by healthy growth across all segments while overseas loans rose 9% QoQ. The management's focus remains on growing the RAM segment. Deposit grew 9% YoY but declined 4% QoQ. CASA ratio moderated 35bp QoQ to 36.2%.

Fresh slippages moderated to Rs 42.4b (2.6% annualized), which coupled with higher write-offs and healthy recoveries/upgrades resulted in an improvement in asset quality ratios. GNPA/NNPA ratio contracted 89bp/ 37bp QoQ to 10.2%/3.3%, respectively, while PCR was stable at ~70%. The total SMA book (>Rs 50m) was at 0.53% of loans v/s 4.2% in 1QFY22. The total restructured loans dipped marginally and stood at 2.92% of loans.

 

Highlights from the management commentary

Credit growth of 12-13% expected in FY23 with share of RAM stable at 56%. Close to 90% of the loan book was floating in nature with the share of EBLR at 33% and MCLR at 52%. The management expects to report recovery of Rs 150b and slippages of Rs 130b in FY23.

Motilal Oswal Recommends Buy With Target Price of Rs 50 per share

According to brokerage firm, "Union Bank of India reported a healthy quarter with earnings beat driven by healthy NII and other income. Provision and opex though remained elevated. Fresh slippages moderated on a sequential basis, which coupled with a low SMA book (0.5%) and controlled restructuring provided a better outlook on asset quality. Loan growth picked up and was supported by all segments - Corporate, Agri, Retail and MSME."

 

Brokerage added, "We raise our PAT estimates by 9% and 3% for FY23E and FY24E as we model higher other income and estimate RoA/RoE at 0.7%/12.3% by FY24E, respectively. Maintain BUY with a Target Price of Rs 50 (premised on 0.6x FY24E ABV)."

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.