Is Union Bank of India still a 'buy' after a 51% rally in just 6 months? Here's what Motilal Oswal says | Mint
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Business News/ Markets / Stock Markets/  Is Union Bank of India still a 'buy' after a 51% rally in just 6 months? Here's what Motilal Oswal says
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Is Union Bank of India still a 'buy' after a 51% rally in just 6 months? Here's what Motilal Oswal says

Shares of Union Bank of India have demonstrated remarkable performance, yielding substantial returns for investors over the past six months. Motilal Oswal maintains a 'buy' rating on Union Bank of India shares and projects a new one-year high for the stock.

The bank's asset quality continues to improve with a constant moderation in NPA ratios. Slippages have primarily been led by the MSME segment, while the corporate segment has remained fairly strong. (Pixabay)Premium
The bank's asset quality continues to improve with a constant moderation in NPA ratios. Slippages have primarily been led by the MSME segment, while the corporate segment has remained fairly strong. (Pixabay)

Shares of Union Bank of India, one of the leading state-owned banks in the country, have demonstrated remarkable performance, yielding substantial returns for its investors over the past six months.

Having surged from 72.30 to the current price of 109, the stock has generated an impressive return of almost 51%. Taking the current trading price into consideration, the bank shares are just 6% away from their 52-week high of 116.

Projections from domestic brokerage firm Motilal Oswal suggest that the bullish trend of the stock is projected to persist, potentially establishing a new one-year high. This optimistic outlook is underpinned by the bank's enhanced asset quality and consistent progress in loan growth.

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Motilal Oswal maintains a 'buy' rating on the stock with a target price of 130 per share, signaling a 19.3% upside.

Loan growth to remain healthy

The brokerage highlights the bank's healthy traction in loan growth, led by continued strength in retail. Further, Corporate and SME segments are also seeing improving trends. The bank is seeing good traction in the steel, cement, power, and infrastructure sectors.

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On the deposit front, the brokerage said the bank is growing retail deposits at a steady pace with the aim of growing deposits through CASA/retail term and not via bulk deposits. The bank has excess liquidity of 770 billion and will utilize this to fund growth.

Asset quality continues to improve

The bank's asset quality continues to improve with a constant moderation in NPA ratios. Slippages have primarily been led by the MSME segment, while the corporate segment has remained fairly strong. Overall, the bank expects recoveries of 160 billion ( 78 billion already made in 1HFY24), while it expects slippages of 130 billion in FY24.

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The bank has recovered 15 billion in 1HFY24 from written-off accounts and expects to recover 40 billion by FY24 end. It focuses on bringing down GNPA in the SME segment, which is high at 11–12%, according to the brokerage. 

Overall, the bank has guided for GNPA and NNPA ratios of <5% and 1% in FY24. With respect to the Ind-AS transition, the bank expects an ECL impact of 80 billion as of September 2023 ( 120 billion as on March 2023) and aims to build a 100% provisioning buffer before the implementation in FY26.

Strong focus on profitability

The brokerage points out that the bank is currently making wage provisions to reflect a 15% salary hike, though the bank expects the wage hike settlement to be in the range of 16–18%. Despite maintaining one of the lowest cost-to-income ratios, the bank envisions further improvements by outsourcing select business functions, as highlighted by the brokerage.

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Having already surpassed its FY24 targets with a RoA and ROE of 1% and17%, the bank sets its sights on sustaining a robust RoA of over 1%. Initiatives to control credit costs, preserve healthy margins, and adapt to a new tax regime underscore its commitment to long-term financial stability, the brokerage added. 

Impact of the recent RBI measures

In the wake of recent RBI measures on risk weight, the bank expects an impact of 50–60 basis points on CRAR and 45–47 basis points on CET-1. The bank has a total unsecured retail portfolio of 110 billion ( 10 billion towards credit card and the rest towards personal loans). Nearly 63% of the total unsecured personal loans are attributed to the salaried segment.

Also Read: How RBI's new regulations on consumer credit will affect fintech lenders

With respect to NBFC exposure of 1.35 trillion, the total Non-PSL book is 725 billion, of which 96% is rated A & above. The brokerage points out that strong profitability and healthy capitalization levels will cushion the impact of the recent RBI measures.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.

 

 

 

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Published: 30 Nov 2023, 03:43 PM IST
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