Shares of Union Bank of India, one of the leading state-owned banks in the country, have shown remarkable performance, yielding big returns for their investors over the last six months.
Increased from ₹72.30 to the current price of ₹109, the stock generated an impressive return of nearly 51%. Given the current trading price, the bank shares are only 6% away from their 52-week high of ₹116.
Projections from domestic brokerage firm Motilal Oswal suggest that the stock’s bullish trend is projected to continue, possibly establishing a new one-year high. This optimistic outlook is supported by the bank’s strengthened asset quality and consistent progress in loan growth.
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Motilal Oswal maintains a ‘buy’ rating on the stock with a target price of ₹130 per share, signaling 19.3% upside.
Loan growth to stay healthy
The brokerage highlights the bank’s healthy traction in loan growth, led by continued strength in retail. Further, Corporate and SME segments are also seeing improving trends. The bank sees good traction in the steel, cement, power and infrastructure sectors.
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On the deposit front, the brokerage said the bank is growing retail deposits at a steady pace with the aim of growing deposits through CASA / retail term and not through wholesale deposits. The bank has excess liquidity ₹770 billion and will use that to finance growth.
Asset quality continues to improve
The asset quality of the bank continues to improve with steady moderation in NPA ratios. Slippages were mainly led by the MSME segment, while the corporate segment remained quite strong. In general, the bank expects recoveries of ₹160 billion ( ₹78 billion already made in 1HFY24), while it expects slips from ₹130 billion in FY24.
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The bank recovered ₹15 billion in 1HFY24 from written off accounts and expected to recover ₹40 billion by FY24 end. It is focused on reducing GNPA in the SME segment, which is high at 11-12%, according to the brokerage.
Overall, the bank led for GNPA and NNPA ratios of <5% and 1% in FY24. Regarding the Ind-AS transition, the bank expects an ECL impact ₹80 billion in September 2023 ( ₹120 billion as on March 2023) and aims to build a 100% interim buffer before the implementation in FY26.
Strong focus on profitability
The brokerage points out that the bank is currently making salary provisions to reflect a 15% salary increase, although the bank expects the salary increase settlement to be in the range of 16-18%. Despite maintaining one of the lowest cost-to-income ratios, the bank anticipates further improvements by outsourcing selected business functions, as highlighted by the brokerage.
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Having already surpassed its FY24 targets with RoA and ROE of 1% and 17%, the bank aims to maintain a robust RoA of over 1%. Initiatives to control credit costs, maintain healthy margins and adapt to a new tax regime underline its commitment to long-term financial stability, the brokerage added.
Impact of the recent RBI measures
Following recent RBI measures on risk weighting, the bank expects an impact of 50-60 basis points on CRAR and 45-47 basis points on CET-1. The bank has a total unsecured retail portfolio of ₹110 billion ( ₹10 billion to credit card and the rest to personal loans). Almost 63% of the total unsecured personal loans are attributed to the salaried segment.
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As regards NBFC exposure of ₹1.35 trillion, the total Non-PSL book is ₹725 billion, of which 96% are rated A & above. The brokerage points out that strong profitability and healthy capitalization levels will soften the impact of the recent RBI measures.
Disclaimer: The opinions and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before making any investment decisions.
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Updated: 30 Nov 2023, 15:43 IST
(tagsTo Translate) Union Bank of India