Union Bank of India at 52-week high, stock rallies 42% so far in October

Post merger of Andhra Bank and Corporation Bank, Union Bank has raised capital which has improved the capitalisation levels of the bank enhancing its ability to absorb asset quality pressures

Shares of Union Bank of India (Union Bank) hit a 52-week high at Rs 51.70, up 8.5 per cent on the BSE in Thursday’s intra-day trade. The stock has rallied 14 per cent in the last two trading days on improved business outlook, despite weakness in the broader market. The stock of the state-owned lender surpassed its previous high of Rs 49.75 touched on October 19, 2021.

Thus far in October, the stock has appreciated by 42 per cent, after most of the rating agencies upgraded outlook of the bank from negative to stable.

In April-June quarter (Q1FY22), the bank’s gross non-performing assets (NPA) ratio reduced by 135 bps on YoY basis to 13.60 per cent and Net NPA reduced by 28 bps on YoY basis to 4.69 per cent as on June 30, 2021.. Credit cost reduced by 135 bps QoQ for Q1FY22.  Operating profit and net profit of the Bank improved by 31.45 per cent and 254.93 per cent respectively on YoY basis during Q1FY22. Net interest income of Bank grew by 9.53 per cent on YoY basis in previous quarter.

“Supported by the regular capital infusion made by the Government of India (GoI), equity raised via qualified institutional placements (QIP) and improved accruals, Union Bank’s capital ratios have improved, as reflected in tier 1 and overall capital to risk-weighted adequacy ratio (CRAR) of 11.1 per cent and 13.3 per cent, respectively, as on June 30, 2021 as against 9.5 per cent and 11.6 per cent, respectively, as on June 30, 2020 (10.4 per cent and 12.6 per cent, respectively, as on March 31, 2021),” CRISIL Ratings said.

The overall ratings continue to reflect the expectation of strong support from the majority stakeholder, GoI, and the bank’s sizeable scale of operations. These strengths are partially offset by modest asset quality and modest, albeit improving, earnings profile, the rating agency said in rating rationale.

“Post merger of Andhra Bank and Corporation bank (w.e.f. April 01, 2020), the bank has raised capital which has improved the capitalisation levels of the bank enhancing its ability to absorb asset quality pressures as well as support growth in the near term. The outlook has been revised to ‘Stable’ from ‘Negative’ on account of improvement in capitalisation levels and profitability which are expected to improve over the medium term,” CARE Ratings said in rating rationale.

According to ICRA, the revision in the outlook on the long-term rating of Union Bank factors in the improvement in its solvency profile, which is expected to be sustained going forward. Supported by the improved capital position, the solvency position has improved over the last one year. With improving profitability metrics and expectations of steady internal capital accruals, the solvency profile is expected to improve further, the rating agency said.

Moody's Investors Service earlier this month raised the rating outlook for nine banks including Union Bank to stable from negative. "Stabilization in asset quality and improved capital are the main drivers of this rating action," Moody's said.

The deterioration of asset quality since the onset of the Coronavirus (Covid-19) pandemic has been moderate, and an improving operating environment will support asset quality. The level of problem loans for rated banks has moved down from 8.5 per cent in FY19 to 7.1 per cent in FY21.  Declining credit costs as a result of improving asset quality will lead to improvements in profitability and capital will remain above pre-pandemic levels, the rating agency said in a statement.