An Equity Research Report on

SANJEEDEEP MISHRA
 Snapshot
CMP- 98.90 | NSE: UNIONBANK| BSE: 532477| INDUSTRY : BANKS

73,309.1 1.7 12.2

Market Capitalization in Cr Price to Book Value Net Profit Qtr Cr

23,613.2 1.68 4.71%

Operating Revenues Qtr Cr Beta (1Year) RoA Annual %

13.84% 25.22% 42.9

ROE Annual % ROCE Annual % Book Value Per
Share Annual Rs
About the Company
Union Bank of India is one of largest state-owned banks in
India. The Bank is a listed entity and the Government of India
holds 83.49 percent in Bank's Total Share Capital. The Bank
has international presence with 3 overseas branches at Hong
Kong, DIFC (Dubai) and Sydney (Australia). In addition, it has
representative offices at Shanghai, Beijing and Abu Dhabi. It
operate in United Kingdom through its wholly owned
subsidiary, Union Bank of India (UK) Ltd. Union Bank of India's
portfolio of services include Retail Banking,
Corporate/Wholesale Banking, Treasury Operations, Cash
Management Services, Merchant Banking, Depository Services,
Online Trading in Securities and Clearing Bank Services. Union
Bank of India was originally incorporated on November 11, 1919
in Mumbai with the name 'The Union Bank of India Ltd.' The
Bank got into growth phase in the 1960's and they aligned their Pursuant to nationalization, the Bank sponsored
activities in line with the national priorities. In July 19, 1969, the four regional rural banks in 1972. In the year 1975,
Bank was nationalised and the name of the Bank was changed Belgaum Bank Ltd, a private sector bank was
to 'Union Bank of India'. amalgamated with the Bank.
 Overview
1. Annual Revenue rose 18.7%, in the last year to Rs 97,078.5 Crores. Its sector's average revenue growth for the
last fiscal year was 12.7%.
2. Quarterly Revenue rose 29.3% YoY to Rs 27,822.3 Crores. Its sector's average revenue growth YoY for the
quarter was 32.4%.
3. Annual Net Profit rose 61.7% in the last year to Rs 8,511.7 Crores. Its sector's average net profit growth for the
last fiscal year was 67%.
4. Quarterly Net profit rose 106.7% YoY to Rs 3,271.7 Crores. Its sector's average net profit growth YoY for the
quarter was 54.6%.
5. Stock Price rose 113.8% and outperformed its sector by 81% in the past year.
6. Price to Earning Ratio is 6.6, lower than its sector PE ratio of 25.3.
7. Debt to Equity Ratio of 0.6 is less than 1 and healthy. This implies that its assets are financed mainly through
equity.
8. Return on Equity(ROE) for the last financial year was 11.7%, in the normal range of 10% to 20%.
9. Mutual Fund Holding decreased by 0.5% in the last quarter to 1.8.
10. Promoter Share Holding stayed the same in the most recent quarter at 83.5%.
11. Interest Coverage Ratio is 1.5, higher than 1.5. This means that it is able to meet its interest payments
comfortably with its earnings (EBIT).
12. Promoter Pledges are zero.
 INDUSTRY ANALYSIS
India is facing a liquidity challenge in its banking system, driven by various factors including increased demand for
cash, slow government expenditure, tax collections, and a negative balance of payments. The Reserve Bank of India
is expected to take measures to address this liquidity deficit, which has implications for short-term borrowing
costs and the overall economic situation. The outlook for liquidity remains uncertain, pending improvements in the
balance of payments.

Current Liquidity Situation in India: Factors Contributing to the Liquidity

According to economists, the second half of the
fiscal year in India is expected to experience a
continued lack of liquidity in the banking
system. This is due to factors such as increased
loan growth and currency circulation. Data from
the Reserve Bank of India (RBI) indicates that
the nation's banks have faced liquidity deficits, a
situation not seen in more than three years.
Challenge:
Vivek Kumar, an economist from QuantEco
Research, points out that the start of the festive
season and expectations of improved economic
growth will likely increase transactional demand
for cash. This increased demand for cash may
lead to an increase in the amount of money in
circulation, potentially adding pressure on
liquidity.
 Impacts of Liquidity Deficit:
The growing liquidity gap is
expected to lead to an increase
in short-term borrowing costs.
To address this deficit, the
Reserve Bank of India may
reduce its currency market
operations and use repo auctions
to inject cash into the banking
sector.
Fiscal Year Start and
Liquidity Levels:
At the beginning of the fiscal
year in early April, there was a
liquidity surplus of more than
8 trillion rupees. The RBI had
previously indicated that a
"multi-year" procedure would
be involved in the removal of
liquidity.
Government Expenditure and Tax
Collections:
Despite high tax collections, government
expenditure, which typically increases
market liquidity, has been slower than
anticipated. Gaura Sen Gupta, an
economist at IDFC First Bank, mentions
that this combination of factors is reflected
in the government's cash balance.
Impact of Balance of
Payments:
A negative balance of
payments has affected
liquidity, with India's balance
of payments being $16
billion in deficit as of March
2022. Analysts predict that
this deficit will continue to
grow over the coming
quarters. The central bank
has had to sell dollars into
the market to counteract
the rupee's decline, which
has further drained rupee
liquidity. Between January
and July, the RBI sold a net
amount of almost $39 billion
from its foreign exchange
reserves.
What is driving investor interest in public sector banks?
The improved performance of PSBs, driven by reforms, mergers, and better asset quality, has attracted investor
interest. These banks have overcome previous challenges and are now considered safer and more stable, although
external economic factors still pose potential risks.

Improved Performance of Positive Financial Results: Outlook and Challenges:

Public Sector Banks (PSBs):
Post the COVID-19 pandemic,
PSBs in India have shown
significant improvement in
their financial performance.
Record profits and better
asset quality have led to
renewed investor interest in
these banks.
Banks reported record profits
in their recent quarterly
results. Write-offs and loan
recoveries contributed to
healthier asset quality
numbers. Write-offs have
allowed banks to focus on
stability in their business.
PSBs are now more stable, with
reduced NPA pressure. Some larger
economic issues, such as high inflation
and policy rates, may impact the
financial system and banks. While PSBs
have seen stable deposit growth, credit
growth has been slower, which could
pose challenges in the future.

Over the past year, the PSU Bank index has surged by 52 percent, outperforming major private banks whose share
prices increased by an average of 12 percent. Specific PSBs like UCO Bank, Punjab And Sind Bank, Bank of
Maharashtra, and Central Bank of India have delivered remarkable returns.
Key Factors Driving Investor Interest:
Asset Quality Review (AQR): The AQR initiated by the Reserve Bank of
India (RBI) in 2015 was a pivotal moment. It helped PSBs identify and
address their bad loan issues, leading to a significant reduction in gross
non-performing assets (NPAs) from 14.6 percent in March 2018 to 5.53
percent in December 2022.
Mega Merger of PSBs (2020): The merger of several PSBs in 2020
streamlined operations and resulted in improved profitability and asset
quality.
Government Support: The government provided funding to banks, and
banks also raised capital to strengthen their positions.
Better Recovery and Due Diligence: PSBs worked on enhancing their
recovery processes and due diligence, improving the overall ecosystem.
Policy Support: Policy decisions have generally favored banks, and
lending practices have improved.
Transparent Recognition: Banks transparently recognized and
reclassified standard restructured advances as NPAs, providing for
expected losses.
Nifty PSU Bank up over 2% on JP
Morgan's India bond inclusion
Nifty PSU Bank Index Surge:
On a recent trading day, the Nifty PSU Bank index saw a
significant increase of over 2%. This surge was driven by
JP Morgan's decision to include Indian government bonds
in its widely watched emerging-market debt index.
Impact on Specific Banks:
Shares of several PSU banks, including Central Bank of
India, Canara Bank, Indian Bank, Union Bank of India, and
Bank of Baroda, gained between 4% to 5% on the same
trading day. Canara Bank and Union Bank of India shares
reached new 52-week highs, while State Bank of India
shares were trading near their 52-week high.
Positive Sentiment in PSU Bank Sector:
Despite recent declines in large-cap private banks, the
PSU bank sector has shown resilience and consistent
advancement. The Nifty PSU Bank index has risen by over
3% despite market volatility, indicating ongoing optimism.
Traders are advised to view dips in this sector as
favorable opportunities.
"In the absence of absorption capacity, they will fall as
fast as they have risen when a block comes to the market"
While PSU banks, especially mid and small-caps, have shown strong recent performance, caution is advised due to
potential volatility. Private banks are still favored for long-term allocation. Market sentiment has been influenced
by global factors and the Federal Reserve's decisions. A short-term correction in the PSU banking sector is
anticipated, but it may not alter the broader market's mid-term outlook.
Caution Regarding Mid and Small PSU Banks: Continued Preference for Private Banks: Despite the
Market experts advises caution when investing in mid recent outperformance of PSU banks, Ajay Bagga still
and small-cap PSU banks. They suggest that allocating believes in the long-term allocation towards private
more than 2 percent of funds towards these banks is banks.
not advisable due to their low floating stock and He notes that private banks have excellent
potential volatility. They emphasizes that while there management and business models, and one year of
are turnaround stories in this sector, they should not underperformance should not change the overall
dominate a portfolio, and investors should be mindful allocation strategy toward them.
of the risks. Market Decline and Factors Affecting PSU Banks: The
Performance of Nifty PSU Bank Index: The Nifty PSU domestic market experienced a decline due to a
Bank index has delivered a strong return of 10.14 hawkish stance by the US Federal Reserve Chair and
percent over the past month, outperforming the Nifty concerns about a prolonged high-interest rate
Bank index's 1.43 percent return. trajectory. PSU banks, especially mid and small-caps,
were among the worst-hit due to stretched valuations
 and yield moderation concerns. Rising oil prices and for the broader markets or the banks themselves.
erratic rainfall added to market caution. Some PSU banking names have run ahead of their fair
US Federal Reserve's Impact on Market Sentiment: valuations, and profit booking is occurring.
The US Federal Reserve's decision to maintain its Performance of Banking Indices: Over the past year,
benchmark interest rate and its indication of likely the PSU bank index has shown significant gains,
future rate increases in 2023 and fewer reductions in outperforming other banking indices. However, it
2024 contributed to market pessimism. experienced profit booking following a sharp run-up in
Recent Performance of PSU Bank Stocks: On a prices. Concerns about the upcoming second-quarter
particular trading day, PSU bank stocks, especially performance of the banking sector are contributing to
smaller ones like Central Bank of India, UCO Bank, and market caution.
Punjab & Sind Bank, experienced a decline. Larger PSU
banks such as SBI, Canara Bank, and Bank of Baroda
also saw declines in their stock prices. Experts suggest
that the "value trade" in PSU banks may be over, and
these banks may experience a correction in the short
term.
Short-Term Correction and Sector-Specific Trends:
There are indications that the extreme buying in PSU
banks could lead to a short-term correction. This
correction may be sector-specific, but it is not
expected to change the mid-term investment thesis
Financial
Statements
Profit and Loss Statement
P/L Analysis
1. Interest on Advances: The interest income from advances has increased steadily from FY21 to FY23, and
there's a significant jump in Q1FY24 compared to Q1FY23. This suggests the bank's loan portfolio has been
growing.
2. Interest on Investments: Interest income from investments has remained relatively stable over the years, with
a slight increase in Q1FY24 compared to Q1FY23.
3. Other Interest Income: Other interest income shows growth over the years and a substantial increase in
Q1FY24 compared to Q1FY23.
4. Total Interest Income: The total interest income (sum of interest on advances, investments, and other interest
income) has shown a steady increase over the years, with a notable jump in Q1FY24.
5. Interest on Deposits: Interest expenses on deposits have also been increasing, indicating the bank's cost of
funds.
6. Other Interest Expenses: Other interest expenses have grown steadily over the years.
7. Total Interest Expense: The total interest expenses (sum of interest on deposits and other interest expenses)
have increased, but the growth is relatively slower compared to interest income.
Net Interest Income (NII): NII, which is the difference between total interest income and total interest expenses,
has shown consistent growth over the years and increased further in Q1FY24. This indicates improved profitability
from the core banking operations. Non-interest income has also shown growth over the years, with a notable
increase in Q1FY24 compared to Q1FY23. This includes income from fee-based services, trading, and other sources.
P/L Analysis
Operating Expenses: Operating expenses have increased over the years but at a slower pace compared to
income growth. This indicates effective cost management.
Operating Profit: The bank's operating profit has increased steadily over the years, with a significant jump in
Q1FY24 compared to Q1FY23. This suggests improved operational efficiency and profitability.
Provisions: Provisions for bad loans (credit provisions) have shown an increasing trend over the years, indicating
that the bank is setting aside more funds to cover potential loan losses.
Net Profit: Net profit has been increasing over the years, with a notable increase in Q1FY24 compared to Q1FY23.
This indicates the bank's ability to generate higher profits, although it also reflects an increase in credit provisions.

The bank has seen consistent growth in both interest income and non-interest income, leading to improved total
income. Effective cost management is evident, as operating expenses have grown at a slower rate than income.
The bank's core banking operations, as reflected in NII, have been consistently profitable and improved further in
Q1FY24. While provisions for bad loans have increased, the bank's net profit has also been on an upward trajectory,
indicating overall financial strength. The significant increase in Q1FY24 results across various income and profit
parameters suggests that the bank is on a positive growth trajectory in the current fiscal year.
Balance Sheet
Balance Sheet Analysis
The bank's capital base has remained stable, indicating a consistent capital structure.
Reserves and surplus have increased consistently, reflecting the bank's ability to generate
profits and build up reserves. Deposits have grown steadily, indicating the bank's ability to
attract and retain customer funds. There has been a reduction in borrowings in Q1FY24,
suggesting a potential reduction in reliance on external funding sources. The bank has
maintained a favorable liquidity position, as seen in the increasing cash balances with RBI
and balances with banks. The growth in advances suggests an active lending strategy in
Q1FY24. Fixed assets and other assets have also increased, indicating investments in
infrastructure and other assets. Overall, the balance sheet indicates a healthy financial
position with stable capital, growing reserves, and a focus on both liquidity management
and lending activities. However, it's important to consider the quality of assets, asset-
liability management, and risk factors in a comprehensive financial analysis.
Peer Comparison
 Investments
Shares have remained relatively stable.
Bonds & Debentures have declined steadily over the
analyzed period.
Others category shows some fluctuations but remains
relatively stable overall.
SLR (Statutory Liquidity Ratio) investments have shown
a steady increase from Mar-21 to Jun-23, indicating that
the bank has been investing more in government
securities or other approved securities to meet
regulatory requirements.
Non-SLR investments have declined over the same
period. This suggests a reduction in investments that do
not fall under the SLR category, potentially indicating a
shift in investment strategy or a reduction in non-SLR
assets.
Commercial Paper and Certificate of Deposits show
some fluctuations but remain relatively stable, indicating
the bank's continued participation in the short-term
money market instruments.
Mutual Funds have seen a fluctuating pattern, with an
increase from Mar-21 to Mar-22 and a slight decrease in
subsequent periods.
Shareholding
Pattern DII
8.2%
Public and Others
6.8%

Promoters holding remains unchanged at 83.49% in Jun 2023 FII

qtr 1.5%

FII/FPI have decreased holdings from 1.66% to 1.46% in Jun 2023

qtr
Number of FII/FPI investors decreased from 216 to 184 in Jun
2023 qtr
Mutual Funds have decreased holdings from 2.24% to 1.79% in
Jun 2023 qtr
Number of MF schemes decreased from 45 to 20 in Jun 2023
qtr
Institutional Investors have decreased holdings from 9.93% to Govt. of India
83.5%
9.34% in Jun 2023 qtr
 Improving NIMs Cost to Income Ratio ROA%

Net Interest Income (Cr.) Region Presence ROE%

GNPA/NNPA % PCR

Deposit Base Cr. CASA Deposit Cr.

CONCALL
HIGHLIGHTS
The subsidiary in South Africa has resumed
operations and supplies to transfer freight
rail have resumed in early June after receipt
of an order from them valued at INR 25
Crores
The factory in Ghana has also been
commissioned in the last week of June
2023. It has a capacity of 240,000 sleepers
per annum, for which we have already
signed a contract of INR 123 Crores with the
railways in Ghana. With this, GPT has
become the largest railway-focused
company in Africa based out of India and
continues to grow in the continent given the
large potential demand in the region.
3 contracts in Mumbai City from
MRIDCL, which is Maharashtra Rail
Infrastructure Development
Corporation Limited. One is a cable-
stayed bridge over Byculla railway
station, another is a bridge over
Ghatkopar railway station there, and
another is a connection of the
Ghatkopar bridge to the Eastern
Expressway. Three Contracts total to
about INR 600 Crores. And the
execution for them is also going on
smoothly. We expect to finish in FY
'25.
They have 3 manufacturing
facilities in Africa, 1 in South
Africa, 1 in Namibia and now 1
in Ghana. They manufacture
and produce for the local
markets there, and their
subsidiaries which in which
the parent company has
invested.
CONCALL
HIGHLIGHTS
Producing concrete sleepers which are
used for railways world over, whether it is
in Africa, India, anywhere else in the world.
Also doing in Bangladesh, Sri Lanka and
Myanmar.
The capacity for the South African facility
is about 400,000 per year. For the
Ghana facility, it's about 240,000 a year.
They have been able to reduce
the debt by INR10 Crores from
the existing cash flow.
Net debt is almost INR 202
Crores as of end of the quarter.
It's consortium lending. So
average interest rate will be
almost 10.5%.
The factory in Namibia is an
associate because it's a PPP
model with the government of
Namibia. The African business for
concrete sleeper fetches, at
EBITDA level, margin of almost
25%, which is much higher than
the Indian sleeper business.
Growth Strategies (as per ConCall)
Asset Recovery and NPA Management: The bank plans to implement end-to-end digital solutions for recovery
management, which can streamline the process, reduce costs, and improve efficiency. Establishing a transaction
monitoring vertical suggests a proactive approach to identifying early credit warnings and potential frauds,
contributing to better asset quality.
Growth in RAM Sector Business: Opening special retail lending processing centers and launching customized
digital products demonstrate the bank's focus on expanding its Retail, Agriculture, and Micro & Small Enterprises
(RAM) portfolio. Digitalization initiatives can enhance the customer experience and streamline operations.
Cost Reduction: Digitization efforts such as Straight-Through Processing (STP) journeys and the Vyom Mobile
Application can reduce manual processes, leading to cost savings. Rationalizing branches and centralizing
processes like account opening, underwriting, monitoring, and recovery are further steps toward operational
efficiency.
Capital Optimization and Risk Management: Introducing advanced risk management tools shows the bank's
commitment to proactively manage risk. Growing the RAM portfolio aims to diversify assets and reduce risk-
weighted assets, which is a prudent risk management approach.
Low-Cost Deposits: Increasing marketing efforts to attract corporate and government agency Current Account
and Savings Account (CASA) accounts suggests a focus on reducing the cost of funds, which can improve
profitability.
 SWOT Analysis
Strength
1. Consistent Highest Return Stocks over Five Years - Nifty500
2. 413.9% returns for Nifty 500 over 5.4 years
3. High Piotroski Score with High Return on Equity (ROE) and EPS Growth
4. 49.1% returns for Nifty 500 over 1.4 years
5. Good quarterly growth in the recent results
6. Overbought by Money Flow Index (MFI)
7. 477.2% returns for over 4.5 years
8. Effectively using Shareholders fund - Return on equity (ROE) improving since last 2 year
9. Efficient in managing Assets to generate Profits - ROA improving since last 2 year
10. Growth in Net Profit with increasing Profit Margin (QoQ)
11. Growth in Quarterly Net Profit with increasing Profit Margin (YoY)
12. Increasing Revenue every Quarter for the past 4 Quarters
13. Increasing profits every quarter for the past 4 quarters
14. Annual Net Profits improving for last 2 years
15. Book Value per share Improving for last 2 years
16. Company with Zero Promoter Pledge
 SWOT Analysis
Weakness
1. MFs decreased their shareholding last quarter
2. 190% returns for over 6.4 years
3. Declining Net Cash Flow : Companies not able to generate net cash

Opportunity
1. 30 Day SMA crossing over 200 Day SMA, and current price greater than open
2. Affordable stocks with good momentum and ROE - All Stocks (subscription)
3. High Momentum Scores (Technical Scores greater than 50)
4. Highest Recovery from 52 Week Low
5. Decrease in Provision in recent results
6. Stock with Low PE (PE < = 10)
7. RSI indicating price strength
 Investment Thesis
The bank's gross advances increased by 12.33% YoY to 8.18 lakh crore. This indicates a growing loan portfolio, which
can be seen as a positive sign for the bank's lending activities. Deposits increased by 13.63% YoY to 11.28 lakh crore,
which shows that the bank is attracting more funds from customers. A strong deposit base is essential for lending
and earning interest income. NII increased significantly by 16.59% YoY to 8840 crore. This suggests that the bank's
interest-earning assets are performing well and generating higher interest income. NIM at 3.13% is a healthy margin,
indicating efficient management of interest-bearing assets and liabilities. Operating profits increased by an
impressive 31.79% YoY to Rs 7179 crore. This indicates effective cost management and growing revenue streams.
PAT increased significantly by 107.67% YoY to Rs. 3236 crore, reflecting strong profitability and efficient risk
management.

CASA at 34.60% is a positive sign as it represents a low-cost source of funds for the bank, reducing the cost of
funds. The Gross Non-Performing Assets (GNPA) at 7.34% and Net Non-Performing Assets (NNPA) at 1.58% are areas
of concern. While the GNPA is relatively high, the NNPA is comparatively lower, indicating some level of provisioning
and asset quality improvement. The PCR at 90.86% is relatively high, which indicates that the bank has made
adequate provisions for potential loan losses, enhancing its financial stability. The decline of 26.10% in fresh slippage
is a positive sign, as it suggests that the bank is managing its asset quality effectively and reducing the inflow of new
bad loans. The credit cost at 0.97% is low, indicating prudent risk management practices. The cost to income ratio
at 43.66% suggests that the bank is efficiently managing its operating expenses in relation to its income.
 Investment Thesis
The increase of 26.11% in book value per share to ₹99.84 is a positive indicator of the bank's overall financial
health and value creation for shareholders. ROA at 1% and ROE at 18.97% are reasonable, indicating that the
bank is generating profits efficiently from its assets and shareholders' equity.

The bank has shown robust growth in its loan portfolio and deposits, which can be attributed to effective
marketing and customer acquisition strategies. Strong NII growth and high NIM indicate efficient interest
income generation and management. The bank has managed its operating expenses well, as evidenced by the
lower cost-to-income ratio. Asset quality, although improving, remains a concern, with a relatively high GNPA.
The bank's focus on provisioning and a high PCR demonstrates its commitment to managing credit risks.
Profitability has improved significantly, as seen in the substantial increase in PAT. CASA and low credit costs
contribute to a favorable cost structure.

Overall, the bank's Q1FY24 performance reflects a mix of positive growth and profitability trends, coupled with
ongoing efforts to address asset quality concerns. It appears to be on a path of stable growth and improving
financial health, but continued vigilance is needed to manage and reduce non-performing assets.