We hereby present you our investment idea for Equity Investment i.e “Pick of the Week”. A thorough analysis of company, industry and economy goes behind our stock ideas for you. With the “Pick of the Week”, you may earn superior returns in stock market over a time horizon of 6 – 9 months.

INVESTING RATIONALE

Benefit from revival in PSU Banks: With the government focusing on reviving growth in the economy, PSU Banks will have to play a key role in jumpstarting infrastructure and capital intensive industries. This is likely to result in consolidation and pushing up reforms in this space. Union Bank of India (UNBK) will benefit on measures to strengthen the balance sheets of PSU Banks to enable them to step up lending.

Improved margins: Margins for FY19 stood at 223bp vs. 207bp in FY18 while QoQ improvement in NIM’s was 4bp and 15bp for only domestic NIM’s. This margin expansion was as a result of higher fall in cost of funds which offset the fall in overall yield. Management has guided for NIM’s above 240bp which implies at least 17bp improvement from FY19 levels.

Corporate slippages contained: Higher provisions post the RBI divergence report along with ageing provisions on some accounts have bolstered the coverage ratio in Q4FY19. The recovery pipeline seems to be strong for FY20 on three large NCLT accounts, which are expected to comprise Rs 3500cr of total recovery estimate of Rs 9000cr. Moreover, slippages from the corporate vertical have moderated while MSME slippages might build some pressure on asset quality. Overall, management has guided for credit cost of 2.15% and a slippage rate of less than 3%.

Key Risks: Asset quality volatility, Slowdown in NCLT recoveries

We maintain a BUY with a target of Rs. 92