Buy Union Bank of India; target of Rs 65: Motilal Oswal

Motilal Oswal is bullish on Union Bank of India recommended buy rating on the stock with a target price of Rs 65 in its research report dated Novemer 02, 2021.

The research firm ICICI Securities believes earnings of apparel brands and retail companies under their coverage may surprise positively from Q3FY22E as the likely demand recovery may result in better than expected margin performance. Some of the costs savings achieved during pandemic may sustain and coupled with high operating leverage may lead to higher than pre-covid margins from Q3FY22E.  Stocks like Trent, V-Mart and Aditya Birla Fashion and Retail are the preferred picks backed by their strong and consistent track record of execution.

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Motilal Oswal’s research report on Union Bank of India

Union Bank of India (UNBK) reported healthy earnings, supported by recovery from the DHFL resolution. Furthermore, fee income trends improved, while domestic margins declined; muted loan growth affected NII growth. On the other hand, asset quality performance was stable despite elevated slippage, largely led by Corporate – this includes slippage from SREI Infra (INR26b). However, higher write-offs and upgrades aided improvement in asset quality on a sequential basis. Moreover, it now carries provisions of 65% on SREI Infra (higher v/s peers). The SMA-2 book declined to 2.3% of loans (v/s 3.7% of loans in 1QFY22). Thus, slippage would moderate from FY23 onwards, and credit costs are expected to come in at 2.2%/1.9% for FY22/FY23. Thus, we estimate RoA/RoE of 0.8%/14.2% by FY24E and maintain a Buy rating.

Outlook

Overall, the management indicated asset quality would continue to improve, aided by moderation in the slippage trend and higher recoveries from stressed asset resolutions. Furthermore, SMA-2 overdues declined to 2.3% of loans, while the restructured portfolio increased to 3.7% of loans. Thus, we estimate credit costs at 2.2%/1.9% for FY22/FY23E and RoA/RoE at 0.8%/14.2% by FY24E. We maintain Buy, with revised Target Price of INR65 (0.7x Sep’21 ABV).

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