Digital Advances Like The VYOM App And Branch Expansion Will Drive Future Customer Acquisition

Key Takeaways

• Advancements in digital initiatives and branch expansion could boost revenue through enhanced customer acquisition and outreach.
  
• Improved asset quality management suggests lower future provisions, enhancing net margins and supporting growth.
  
• Slowed credit growth, large account recovery issues, and rising cost of funds pose challenges to Union Bank's revenue, net interest margin, and asset quality.

Catalysts

Provides various banking products and services.

• The bank's capital adequacy ratio has improved to 17.13%, with a CET ratio of 13.88%, which could support future loan growth and enhance earnings.
  
• Significant advancements in digital initiatives, such as the VYOM app and digital onboarding, could drive revenue growth through improved customer acquisition and engagement.
  
• The reduction in gross NPA by 202 basis points and improvement in the PCR to 92.79% are indicative of better asset quality management, potentially leading to lower future provisions and improved net margins.
  
• Expansive efforts in digital product offerings and branch network growth, including 122 new branches, could bolster revenue by increasing the bank's reach and customer base, particularly in retail and MSME segments.
  
• The bank has a healthy credit pipeline with ₹36,000 crores pending disbursement and sectoral focus on infrastructure, renewable energy, and real estate, which could drive advances growth and subsequently, revenue.

Union Bank of India Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Union Bank of India's revenue will grow by 11.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 30.7% today to 25.9% in 3 years time.
• Analysts expect earnings to reach ₹179.0 billion (and earnings per share of ₹22.81) by about December 2027, up from ₹153.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹151.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.5x on those 2027 earnings, up from 6.4x today. This future PE is lower than the current PE for the IN Banks industry at 13.1x.
• Analysts expect the number of shares outstanding to grow by 0.91% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.15%, as per the Simply Wall St company report.

Union Bank of India Future Earnings Per Share Growth

Risks

• The slowing down of credit growth compared to deposits could indicate potential challenges in meeting revenue and net margin goals if the competitive pressures continue to constrain growth.
  
• A significant portion of recoveries are still impending from large account slippages, which poses a risk to achieving targeted earnings through expected recoveries.
  
• Revenue generation may be affected by the mandatory adjustments in penal interest, leading to a shift in income recognition from interest to non-interest income, potentially impacting net interest margin stability.
  
• The slower growth in CASA, coupled with increased reliance on retail term deposits, might raise the bank’s cost of funds, impacting net interest margin and profitability.
  
• Ongoing uncertainties in large public sector lending highlight potential asset quality issues, indicating risks to future earnings and provisions if large defaults or restructurings occur.

Valuation

• The analysts have a consensus price target of ₹145.11 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 2027, revenues will be ₹691.3 billion, earnings will come to ₹179.0 billion, and it would be trading on a PE ratio of 9.5x, assuming you use a discount rate of 14.1%.
• Given the current share price of ₹129.19, the analyst's price target of ₹145.11 is 11.0% 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.