The brokerage has introduced merged financials and expects the bank to report negative RoA of -0.2 per cent due to the merger and Covid-19-related pain.
Emkay Global has given a sell rating to Union Bank of India with a 12-month target price of Rs 26. The share price moved up by 0.76 per cent from its previous close of Rs 32.90. The stock’s last traded price is Rs 33.15.
Despite strong other income supported by treasury gains, Union Bank posted a massive loss of Rs 25 billion, owing to higher NPA provisions, including Rs 25.1 billion as NPA provisioning harmonisation before the merger with Andhra/Corporation Bank.
Headline GNPA improved 71bps quarter on quarter to 14.1 per cent, mainly due to the moratorium and higher write-off. Nearly 24 per cent/26 per cent loans for standalone/merged banks were under moratorium as of March 31, which is not comparable with other banks. The brokerage believes that the bank’s (merged) higher share of SME portfolio could pose asset quality risk due to Covid-19.
Investment Rationale
The brokerage has introduced merged financials and expects the bank to report negative RoA of -0.2 per cent due to the merger and Covid-19-related pain, but to gradually improve to 0.2 per cent by FY23, benefiting from a better margin profile of merging banks and lower loan loss provision.
The brokerage maintains a sell rating on the stock with a revised target price of Rs 26 (now based on 0.5 times FY22E ABV of the merged bank), mainly due to its relatively weak asset quality profile, subdued return ratios and merger overhang.
Key risks: Higher treasury gains given the bank’s higher AFS portfolio, one-off gains from the stake sale in the insurance business and slower NPA formation than expected. Earnings Estimates
Financials
For the quarter ended March 31, 2020, the company reported consolidated interest income of Rs 6277.87 crore, down -2.71 per cent from last quarter interest income of Rs 6452.83 crore and up 6.40 per cent from last year same quarter interest income of Rs 5900.01 crore. The bank reported net profit after tax of Rs -2629.27 crore in the latest quarter.
Promoter/FII Holdings
Promoters held 86.74 per cent stake in the company as of March 2020, while FIIs held 1.29 per cent, DIIs 6.38 per cent and public and others 5.59 per cent.
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