Recommendation from Banks Sector

This section gives a recommendation of a stock having stock price below Rs 150 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

UNION BANK OF INDIA : WORTH BANKING UPON

HERE IS WHY
✓ Increase in consolidated interest income.
✓ Positioned for continued value creation.
✓ Maintains a robust capital adequacy ratio.

The banking sector in India continues to perform exceptionally well despite the current market downturn. This is largely due to the sector’s stable profile, bolstered by robust operating profits, manageable credit costs, and an expanding loan portfolio. The projection for India’s GDP growth stands at 6.5 per cent for FY25-26, which is expected to fuel a recovery in credit growth from 11 per cent to 13-14 per cent as liquidity conditions improve. Given these factors, we recommend the Union Bank of India (UBI) as a lowpriced scrip in this issue. UBI, a prominent public sector bank, boasts a vast network of domestic branches, ATMs, and business correspondent points.

It also has an international presence. It is noteworthy that UBI was the first large public sector bank in India to fully implement a core banking solution. The bank’s reach and services expanded following the amalgamation of Andhra Bank and Corporation Bank in April 2020. UBI offers a diverse range of financial products, including banking services, government business, merchant banking, and agency business that encompasses insurance, mutual funds, and wealth management. In Q3FY25, the bank’s consolidated interest income increased by 6.32 per cent year-on-year (YoY) to ₹27,134.77 crore, up from ₹25,520.92 crore in the same quarter of the previous year.

Its interest expenditure also rose by 9.42 per cent to ₹17,764.59 crore YoY, compared to ₹16,235.51 crore in the same quarter of the previous year. The net profit stood at ₹4,597.17 crore, a YoY increase of 27.33 per cent, though it sequentially decreased by 7.79 per cent from ₹4,721.83 crore. UBI’s strategic focus on sustainable growth is evident in its prioritisation of profitability and operational efficiency over aggressive expansion. This is demonstrated by its conscious decision to shed high-cost bulk deposits and focus on improving the current account savings account (CASA) ratios.

UBI’s financial profile is strengthening, as evidenced by significant improvements in asset quality. Notably, its gross non-performing assets (GNPAs) have been reduced to 3.85 per cent, a significant 98 basis points year-on-year decrease, while the net non-performing assets (NNPAs) improved to 0.82 per cent, reflecting a 26-basis point enhancement. Despite a slight moderation in the net interest margin (NIM) to 2.91 per cent, the bank’s strategic focus on optimising its deposit mix and driving non-interest income growth contributes to its overall financial stability. These figures, combined with the bank’s focus on recovery of bad loans, indicate a bank that is steadily improving its financial health. UBI’s shares are currently trading at a trailing 12-month (TTM) price-tobook ratio of 0.86 times, which is marginally higher than the industry average of 0.83 times.

The bank exhibits solid profitability metrics, with a return on assets (ROA) of 1.03 per cent and a return on equity (ROE) of 15.6 per cent. This ROE indicates efficient utilisation of shareholder equity in generating profits. Moreover, the bank maintains a robust capital adequacy ratio (CAR) of 16.72 per cent, significantly exceeding regulatory requirements and signalling strong financial stability and resilience against potential risks. Despite the slightly elevated PBV, the ROA, ROE and CAR all point to a bank with strong fundamentals. Given the bank’s financial status and the potential for growth, we recommend BUY.