'Neutral' on Union Bank, target price Rs 160: Motilal Oswal

May 10 2014, 12:41 IST
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SummaryWe maintain our neutral rating on Union Bank of India with a target price of Rs 160 a share.

We maintain our neutral rating on Union Bank of India with a target price of Rs 160 a share. Weak core operations keep the risk of dilution at lower than the book value. RoA’s and RoEs are expected to be low at 0.5% and 10/11% over FY15/16.

Core operating performance has stabilised at lower levels over last few quarters. However, asset quality continues to disappoint. While the management expects to contain GNPAs, the restructuring pipeline remains high at R1,700 crore.

Ageing of the NPA pool will keep credit cost high at ~1% over FY15/16. We maintain our estimates till PBT level, however lower tax rate (25%, earlier estimate of 33% and management guidance of 20%) has led to PAT upgrade of ~10%. While we maintain the estimates till PBT level, a lower tax rate (25%, earlier estimate of 33% and management guidance of 20%) has led to PAT upgrade of ~10%.

Union Bank Q4FY14 PAT of R580 crore (down 27% y-o-y) was 64% above estimate. NII and PPP were in line with estimates at R2,050 crore (+4% y-o-y) and R1,320 crore (down 22% y-o-y). Higher-than-expected provisions of R920 crore (expectation of R780 crore) led to 24% lower-than-expected PBT, though tax write-back of R180 crore resulted in PAT beat.

Net slippages remained elevated at R1,010 crore (net slippage ratio of 1.9%) compared to R890 crore in Q3FY14. GNPAs (in absolute terms) increased 9% sequentially.

- Motilal Oswal

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