>Union Bank of India - BUY (LKP SHARES)

Union Bank of India - BUY

Investment Rationale

# Strong profitability: UBI has reported operating profit at Rs.8.5bn, a growth of 34% yoy. NII increased to Rs.11bn, a strong growth of 50% yoy thus resulting in robust operating and net profits. PAT was reported at Rs.6.7bn growing by 84%. We are impressed by the NIMs reported at 3.22% vis-à-vis 2.7% a year ago, an increase of 52bps due to significant pricing power as well as credit growth.

# Asset quality: Looking at the trend over past five quarters for the company, the asset quality has consistently shown improvement which gives us further comfort as this would enable lower provision requirements going ahead. Currently, the provision coverage ratio stands at 92%, giving good strength to bank’s balance sheet. Higher provision coverage ratios in excess of 90 per cent and lower net NPA ratio at 0.14 per cent would keep it on strong footing in terms of
asset quality. The provision coverage ratio is expected to be in the range of 85-90 % going forward, which would help contain net NPAs at lower levels of ~ 0.3 %.

# Business Growth: UBI has been able to maintain an average pace of growth at 23% over past 5 quarters, in line with the industry growth. However, going forward with the prevailing slowdown, we expect the credit growth to slow down to ~ 20% for next two years. CASA, as a % of total business mix stood at 30% vis-à-vis 33% last year. We believe UBI shall be able to maintain this healthy CASA ratio, thus able to leverage NIMs at close to ~3% going forward.


# Ratios: This bank has been able to maintain robust return ratios on equity and assets. RoA stands at 1.92% up from 1.31% yoy. RoE has also significantly improved from 26.11% to 39.15% in Q309. We expect UBI to maintain healthy return ratios going forward as well.

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