Investec on Monday said Union Bank of India is now trading close to its historical average with enough margin of safety built into both valuations and estimates. It upgraded the PSU bank stock to 'Buy' from 'Hold' earlier with a revised target price of Rs 150 per share against Rs151 apiece earlier.
In addition to the balance sheet and profit & loss comfort, Union Bank has stable RAM (retail, agriculture and MSME) slippages trends, moderate SMA (Special Mention Account) 1 & 2 and two large pool (7 per cent of advances), which together with the higher core pre-provision operating profit (PPoP) should ensure enough comfort on profitability.
"While a lot of these are available in Indian Bank too, valuations for Union Bank at 0.8x against 1x for Indian Bank offers relative comfort and absolute upsides on our target multiple of 0.9 times FY26e. Hence, we chose to upgrade Union Bank over Indian Bank, Bank of Baroda (BoB) or Canara Bank," Investec said.
The foreign brokerage said the PSU bank stock has corrected nearly 30 per cent over the last 3.5 months amid concerns over higher corporate asset quality stress, as its SMA book increased and management voluntarily provisioned for the corporate accounts. Besides, slower deposits growth for the system and regulatory headwinds have led to the sector underperformance, it said.
"Union Bank has one of the highest cushions on liquidity, capitalisation and provisioning. In addition, core PPoP is superior to peers and hence allows the bank to absorb higher credit costs and yet report 1 per cent RoAs. We moderately tweak estimates and target price and upgrade Union Bank to a BUY," Investec said while suggesting a revised target of Rs 150 against Rs 151 earlier.
Union Bank, Investec said, offers higher balance sheet cushion with LCR at 138 per cent, CDR at 72 per cent and CET1 at 13.8 per cent, all of which are important to ensure RoAs continues to remain in the 1 per cent range.
"In addition, the bank also has higher core PPoP at 1.76 per cent which ensures that the profitability is protect even during ECL transition or any shock events like bulky slippages," it said.