Union Bank of India rated ‘Buy’; performance in the quarter was decent
Q2FY19 core PPOP was in line, and it reported PAT of Rs 1.4 bn vs our forecast of a loss of Rs 1.6 bn, due mainly to lower provisioning (coverage was flat q-o-q). Like most corporate banks, core PPOP performance (up 15% y-o-y) is stabilising, and with improved pricing power PPOP growth of 10% for FY19F is possible. The weak link in Union Bank remains its lower coverage at 51%, coupled with its weak capital position of CET-1 at 7.5%. Management acknowledges that the bank is behind peers on coverage, and that, along with 7-8% growth aspiration, poses material dilution risk.
We factor in Rs 50 bn of equity capital leading to 50% dilution over FY19-20F. With coverage ramp-up cover over the next few quarters, we expect Union Bank’s RoE to normalise to 10% by FY21F. With an improving PPoP outlook for corporate banks and undemanding valuations of <0.5x Sep-20 adjusted book, we maintain our Buy rating, with a lower TP of `90 based on 0.6x Sep-20 book (29% implied upside); but dilution risk remains large and hence we relatively prefer AXSB IN/ ICICI IN/SBIN IN – all Buy rated.