WHY UNION BANK IS FIRING ON ALL CYLINDERS

A Manimekhalai MD & CEO

THE UNION BANK STOCK WHICH HAD ALREADY BEEN ON AN UPSWING SINCE JULY, RECENTLY SHIFTED TO OVERDRIVE AFTER THE SECOND QUARTER RESULTS WERE ANNOUNCED. THE RECENT VERTICAL CLIMB WAS OF COURSE PROMPTED BY THE OVERALL GOOD NUMBERS RECORDED BY THE BANK IN Q2, BUT THERE IS ALSO MORE TO IT THAN CATCHES THE EYE. FOR INSTANCE, UNDER ITS NEW MD & CEO A MANIMEKHALAI, WHO TOOK CHARGE ONLY IN JUNE THIS YEAR, UNION BANK HAS OUTPERFORMED THE ENTIRE BANKING SYSTEM’S CREDIT GROWTH RATE AND DEPOSIT GROWTH RATE IN Q2 BY A SIZABLE MARGIN. THE UNION BANK STOCK, WHICH ALREADY SITS ON AN OVER 63% GAIN DURING THE PAST 12 MONTHS, IS ALL SET TO MAKE IT 100% OR DOUBLE ITS VALUE, AS PER SOME BROKERAGE AND ANALYST ASSESSMENTS. AS A LONG-TERM HUMAN RESOURCE DEVELOPMENT INITIATIVE, THE BANK HAS ALSO LAUNCHED TWO INDUSTRY-FIRST COMMITTEES, EMPOWERHER AND EMPOWERHIM, FOR SERVING THE UNIQUE GROWTH AND EMPOWERMENT NEEDS OF FEMALE AND MALE WORKFORCE OF THE BANK.

During the July-September quarter, the results for which were announced recently, the leading PSU lender grew its net profit by 21% on a year-on-year basis or compared with the corresponding quarter of last fiscal. Union Bank’s bottomline increased to Rs. 1,848 crore in Q2 from Rs. 1,526 crore a year ago.

The key driver for this bottomline performance was strong loan growth, especially in retail loans. The market was most impressed with this development as traditionally PSU banks like Union Bank have been relying more on wholesale or corporate loans for their growth requirements.

While total advances in Q2 increased 22% YoY, there was a 15% growth in retail, agriculture and MSME segments, which are generally perceived as safer loans. The bank’s mainstay segments continued their robust performance with a 22% growth in corporate loans led by segments like infrastructure, iron & steel, chemicals and NBFCs. Outstanding advances stood at Rs. 7,73,000 crore as of September 2022.

Why this is an outstanding performance is that Union Bank’s loan book growth of 22% YoY, is a much higher rate than the entire banking system's pace of loan book expansion which came in at just 16.4% in the quarter ended September 2022.

The performance came in as a strong endorsement for the leadership of its MD & CEO A Manimekhalai who had assumed charge on June 3rd this year.

Q2 is the first full quarter under her leadership to report the earnings. Manimekhalai, an MBA holder from Bangalore University and Diploma holder in Human Resource Management from NMIMS, Mumbai, is a veteran PSU banker who excelled in her long stints at Vijaya Bank where she was General Manager and at Canara Bank where she was Executive Director.

A consummate banker, she is well versed in devising and implementing strategic policies, covering core areas like strategic planning, setting organisational goals, growth strategies, action plans, compliance, internal control etc. Such skills helped her play a pivotal role in the complex merger of Canara Bank and Syndicate Bank.

Under her visionary leadership, Union Bank’s credit growth has been strong, and its Net Interest Income (NII) also grew by 22% year-on-year during Q2 to touch Rs 8,305 crore. The Net Interest Margin (NIM), which is the difference between the interest earned and interest paid and a core metric of profitability, expanded by 20 basis points (bps) to 3.15% as of September 30.

In fact, the Mumbai headquartered lender could have put up a higher growth in its net profit, if not for a fall in non-interest income during this quarter. There was an 18% decline in non-interest income, which fell to Rs 3,276 crore, driven mainly by treasury losses and lower recoveries in writtenoff accounts than expected.

Soon after taking charge of the corner office at Union Bank, MD & CEO A Manimekhalai led the establishment of an industry-first, dedicated and women-focused Committee ‘EmpowerHer’ as part of its flagship HR initiative ‘Prerna’. The program aims to promote women’s career trajectory and improve diversity in the bank by navigating through existing biases and challenges, and will benefit the over 21,000 women who are an integral part of the Union Bank workforce.

With pan India representation, the 40 women Committee members will directly engage with the management to develop effective structural changes that will establish Union Bank of India as the most preferred employer brand for women. The launch event was graced by several women leaders from the industry who provided powerful insights to the Committee members on how to undertake their new responsibility.

This was soon followed up by a complementary Committee for men,

‘EmpowerHim’, which was also an industry-first. The program aims to promote the employees’ career trajectory and improve diversity in the Bank by picking out and resolving individual as well as common existing challenges. As representatives of the male employees who comprise over 70% of the bank's workforce, the Committee will help male employees understand local problems, highlight the importance of gender equity, focus on sensitization at work, and provide sustainable and consensus-based solutions to existing pain-points.

Delving deeper into its sustainable performance, Union Bank has shown a further signal of turning into a more retail focused operation on its deposits front, during this quarter. The bank’s deposits grew by over 14% YoY in Q2, and a highlight of this growth was the addition of around Rs 40,000 crore in current account and savings account (CASA) deposits, which is the real engine of growth for a bank, especially for pushing retail credit growth. The CASA ratio stood at 35.63% by the end of Q2, and Union Bank is pursuing varied strategies to improve it further in the coming quarters.

On the deposits front too, Union Bank outperformed the entire banking system in Q2. While deposits touched Rs. 10,43,000 crore, growing at a pace of over 14%, the entire banking sector’s deposit growth rate was way below at 9.2%.

On the provisioning and asset quality front, provisions rose by over 4% amounting to Rs 4,077 crore in Q2, dominated mainly by higher provisioning on standard assets. The provision coverage ratio rose to 86.61% for the quarter under review from 81.77% a year ago. The bank made total recoveries worth Rs 5,685 crore in Q2 while fresh slippages stood at Rs 2,913 crore.

The fresh slippages have moderated by 31% sequentially, driven by both lower corporate and retail slippages. This emerging stability along with higher write-offs and healthy recoveries and upgrades, resulted in an improvement in asset quality ratios.

The performance in recoveries and slippages were largely according to the guidance provided earlier by Union Bank. The management had guided for slippages for the whole fiscal at Rs 13,000 crore, of which slippages so far in Q1 & Q2 have been at Rs 6,700 crore. In recoveries, against a full fiscal guidance and target of Rs 15,000 crore, the bank has already made recoveries to the tune of Rs 8,500 crore.

Improving asset quality ratios gave Union Bank another shot in its arm post Q2 numbers. The bank saw an improvement in asset quality as gross non-performing asset (GNPA) ratio fell by 419 bps YoY to 8.45% in Q2, while the Net NPA ratio (NNPA) declined by 197 bps to 2.64%. The bank has in fact performed better than its own given guidance of 9% for gross NPA and 3% for net NPA for the whole year, so far.

Eyeing strong credit growth ahead, Union Bank is also planning to raise funds via a Qualified Institutional Placement (QIP), latest by Q4 of this fiscal itself. The bank has already won approval to raise Rs 3,800 crore through this share issue, while the overall fundraising plans for the year is for Rs. 8100 crore. Apart from the QIP, the bank is planning to raise the rest via tier-I bond issues. Of this, Union Bank has already raised Rs 1,320 crore through bond issuances this fiscal. The bank's Capital Adequacy Ratio (CAR) stood at 14.5% in September 2022, up from 13.64% a year ago.

Apart from the over 63% surge in its share price during the past 12 months, Union Bank is also a high dividend payer for its investors. At current prices, the dividend yield of Union Bank stock stands at a high 3.56%. Coupled with a modest price-earnings multiple of just 6 times and a priceto-book ratio of just 0.56 times, this makes Union Bank an attractive bet for many investors.

However, on its part, Union Bank is continuing to offer a more conservative stance regarding upcoming quarters. MD & CEO A Manimekhalai has guided that the bank continues to maintain a conservative credit growth target of 10% to 12% for the current fiscal year despite the strong growth in the second quarter.

Among its various growth strategies, Union Bank is also pursuing the establishment of Digital Banking Units (DBUs). It has recently operationalized six such Digital Banking Units. A DBU is envisioned as a specialized hub housing digital infrastructure for delivering as well as servicing existing financial products & services digitally, in both selfservice and assisted modes.

The first six DBUs of Union Bank have come up in Rajahmundry & Machilipatnam in Andhra Pradesh; Palakkad in Kerala; Sagar in Madhya Pradesh; Nagpur in Maharashtra; and Agartala in Tripura. Around 27 services have been made available at Union Bank DBUs using infrastructure like ATM, CRM (Cash Recycling Machine), Passbook Printing Kiosk, Multifunctional Kiosk, Interactive Tablets, Internet Banking Kiosk / PC, Video KYC and Video Chat Kiosk / PC. These Union DBUs are thus future ready banking outlets and will pave the way for not only growth and financial inclusion but digital financial literacy.