Bank Will Expand Customer Reach With New Branches And Digital Initiatives

Key Takeaways

• Efforts to improve asset quality and shed high-cost deposits could enhance profitability and net interest margins, impacting net margins positively.
  
• Expansion through new branches and digital initiatives aims to drive long-term revenue growth with a focus on profitable and efficient operations.
  
• Union Bank of India faces revenue and earnings pressure from macroeconomic challenges, strategic deposit reduction, and credit growth concerns affecting investor sentiment and asset quality.

Catalysts

Provides various banking products and services.

• Union Bank of India's ongoing efforts to improve asset quality with a reduction in Gross NPA and Net NPA and increased provision coverage ratio are expected to enhance profitability by reducing future credit losses, potentially impacting net margins positively.
  
• The company’s strategy to shed high-cost bulk deposits aims to optimize the cost of deposits and improve net interest margins (NIM), which could translate into improved earnings as more efficient cost structures are implemented.
  
• The bank’s expansion plan, including opening new branches and launching digital initiatives, is likely to drive longer-term growth in revenue streams through greater customer reach and diversified product offerings.
  
• Scheduled slippages and recoveries align with the bank’s guidance and demonstrate a focus on recovery over slippages that can potentially restore more balance and enhance future earnings stability.
  
• With a sustainable growth strategy focused on profitability and operational efficiency, the bank expects to deliver long-term stakeholder value, positively influencing revenue growth through better allocation of capital and resources.

Union Bank of India Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Union Bank of India's revenue will grow by 11.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 32.3% today to 26.8% in 3 years time.
• Analysts expect earnings to reach ₹186.3 billion (and earnings per share of ₹23.71) by about January 2028, up from ₹163.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹213.0 billion in earnings, and the most bearish expecting ₹158.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.1x on those 2028 earnings, up from 5.3x today. This future PE is lower than the current PE for the IN Banks industry at 9.6x.
• Analysts expect the number of shares outstanding to grow by 0.97% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.22%, as per the Simply Wall St company report.

Union Bank of India Future Earnings Per Share Growth

Risks

• The bank faces challenges due to a challenging macroeconomic environment characterized by tight liquidity conditions, global economic uncertainty, and volatility in the Indian rupee and capital outflows. These factors can place pressure on revenue and earnings growth.
  
• There is a reported moderation in business growth for the quarter, attributed to a strategic decision to reduce high-cost deposits. This could impact short-term revenue growth and net interest margins.
  
• Union Bank's growth in deposits and credit is trailing behind other public sector banks, which could potentially lead to a downgrading of its stock and affect investor sentiment and future revenues.
  
• The macroeconomic environment with slower nominal GDP growth in India directly influences credit growth, potentially limiting Union Bank's ability to expand its loan book and impact future earnings.
  
• The increase in SMA-2 accounts due to a large single account signals potential risks in asset quality, impacting gross non-performing assets (NPAs) and increasing provisioning which could negatively impact net margins.

Valuation

• The analysts have a consensus price target of ₹144.7 for Union Bank of India based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹170.0, and the most bearish reporting a price target of just ₹120.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹694.7 billion, earnings will come to ₹186.3 billion, and it would be trading on a PE ratio of 9.1x, assuming you use a discount rate of 14.2%.
  
• Given the current share price of ₹112.54, the analyst's price target of ₹144.7 is 22.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.