Sell Union Bank of India; target of Rs 26: Emkay Global Financial

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Emkay Global Financial's report on Union Bank of India

Despite strong other income supported by treasury gains, Union Bank posted a massive loss of Rs25bn, owing to higher NPA provisions, including Rs25.1bn as NPA provisioning harmonization before the merger with Andhra/Corporation Bank. Headline GNPA improved 71bps qoq to 14.1%, mainly due to the moratorium and higher write-off. Nearly 24%/26% loans for standalone/merged bank were under moratorium as of March 31, which is not comparable with other banks. We believe that the bank’s (merged) higher share of SME portfolio could pose asset quality risk due to Covid-19. We introduce merged financials and expect the bank to report negative RoA of -0.2% due to the merger and Covid-19-related pain, but expect to gradually improve to 0.2% by FY23, benefiting from a better margin profile of merging banks and lower LLP.

Outlook

We maintain a Sell rating on the stock with a revised TP of Rs26 (now based on 0.5x FY22E ABV of merged bank) and UW stance in sector EAP, mainly due to its relatively weak asset quality profile, subdued return ratios and merger overhang.

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