We reiterate an outperform rating on Union Bank with a target price of R220 a share given the decline in new stress loan formation in Q1FY15. Its new stress loan formation in the quarter was lower than other banks, which is a positive, in our view.
Union Bank's Q1FY15 PAT at R660 crore was higher than expectation, owing to write-back of investment depreciation of R140 crore and a sharp increase in income from the recovery of written-off assets. PAT grew 18.5% y-o-y and 14.7% q-o-q, the highest earnings growth among the PSU banks under our coverage.
Although slippage at R1,270 crore was somewhat higher than R1,200 crore in Q4FY14, it was within our expectation. Gross NPLs rose 7% q-o-q in the quarter. Fresh restructuring fell q-o-q to R460 crore (from R1,330 crore in Q4FY14), coming in far lower than management’s guidance. New stress loans declined 31% q-o-q to R1,740 crore. Total outstanding restructured loans fell 3% q-o-q.
Stress loans stood at 9.3%, comprising gross NPLs of 4.3% and restructured loans of 5%. Union Bank slippage was lower than the PSB average in the quarter. At 2.5% of lagged loans, slippage was in line with that of Bank of Baroda and substantially lower than PNB/Bank of India/Allahabad Bank/Canara Bank. Within slippage, REI Agro is the biggest account at c.R200 crore.